BUSINESS

How to borrow $5,000 from 100 creditors

Prosper.com is the place to go when your bank turns you down

JOHN INTINI July 1 2006
BUSINESS

How to borrow $5,000 from 100 creditors

Prosper.com is the place to go when your bank turns you down

JOHN INTINI July 1 2006

How to borrow $5,000 from 100 creditors

BUSINESS

Prosper.com is the place to go when your bank turns you down

JOHN INTINI

Kara Hopkins’ one-carat diamond solitaire is collecting dust in a New York City pawnshop. That’s because in March, she and her husband, Brian, a 30-year-old financial consultant, hawked it for US$4,000 to pay off some of the massive credit card debt they accumulated last fall by putting their entire Jamaican getaway wedding on plastic. Her family, which wasn’t thrilled with her choice in husband, refused to help. Now, months later, and still saddled with debt, Kara desperately wants her ring back (the pawnshop is keeping it in storage until September). “My finger feels naked,” says the 29-year-old Web producer. “But with our credit, I can’t go to a bank for a loan—they’d just laugh at me.”

So the Manhattan couple turned to prosper.com—a unique stranger-to-stranger website (available only to Americans) that links wannabe borrowers with regular people—and offered 15-75 per cent interest to anyone willing to take a chance on them. “It’s a new asset class,” says Chris Larsen, the CEO of Prosper, which launched in February. “It’s a sort of consumer bond.”

Here’s how it works: borrowers (there are always about 1,000 on the site) post how much money they need and the maximum interest rate they’re willing to pay (rates are capped at 29 per cent). Multiple potential lenders then make bids on how much they’d give (usually between $50 and $100), and at what interest rate, to try to win the right to partially fund a loan. The worse a borrower’s credit—ranked in one of eight categories between AA to HR (high-risk)—the higher the interest rate. Listings are posted for up to 10 days; loans, which are paid back over a three-year term, can be no greater than $25,000. “We’re not a one-toone buyer-seller model like eBay,” says Larsen. “It’s a one-to-many model. For lenders it’s safer to make a hundred $50 loans than it is to make one $5,000 loan.”

Just like an online dating site, borrowers post photos of themselves with kids, pets or beat-up old cars to attract attention. (The Hopkinses opted for a wedding pic.) And they can add legitimacy by linking with a group —there are about 1,000 different ones —that has a great repayment record. Prosper runs credit checks, administers all transactions, and sends collection agencies after those who default on loans. It charges borrowers one per cent at closing (lenders are subject to a 0.5 per cent service charge). “We

are the gatekeepers,” says Larsen, who previously ran E-Loan, a Web-based company that funded US$27 billion in loans during his tenure. “We just make sure the people are who they say they are. It’s up to the lenders to decide if they should get money.”

The borrowing needs are wide-ranging: from small business dreams to paying off student debt to covering cosmetic surgery. Michael Johnson (credit rating: AA), a 39year-old from Hollywood, Calif., wants US$8,000 to help bankroll a documentary and is offering to pay 10.5 per cent interest. The site also provides him with a built-in focus group. “If people aren’t willing to give you money,” says Johnson, “it might be a sign.” Last week, the Hopkinses faced that reality when their second attempt on Prosper came up short. For lenders, Kara Hopkins’ reward wasn’t worth the risk. M