How to bypass the bank and get a loan
Websites are allowing person-to-person loans, cutting out the middleman.
from the April 30, 2007 edition
Page 2 of 4
The estimated average annual return on loans to borrowers with AA to D credit scores ranges from about 6.0 to 8.5 percent, according to the company. Returns for loans to borrowers with E and HR (high-risk) rated credit scores are negative, though Prosper has recently strengthened its requirements, mandating that borrowers have a credit score of at least 520 to be eligible to apply for a loan.
Some lenders use other criteria to improve their rates of return. Kurt Dickey, a North Carolina technology product specialist has lent almost $40,000 on over more than 240 loans. He has a standing that allows him to automatically bid on loans when preset criteria – including credit grade, home-ownership status, repayment method, past defaults, membership in community groups, debt-to-income ratio, and interest rates – are met.
"I tweak it," says Mr. Dickey. "When I do have time and I have money, I go on there and troll around and find loans that I have an interest in."
Dickey's investing efforts are paying off. He says that according to his lender's statements, his rate of return is 13.6 percent.
But the returns are not risk-free, says Russell Wild, an Allentown, Pa., financial planner and author of "Bond Investing for Dummies" due out in September. The risks that lenders face include defaults and the potential for fraud, Mr. Wild says. He also notes that the rate of return is inflated, since it doesn't take into account the time money spends sitting idle in a Prosper cash account not making any return at all.
Indeed, Dickey notes that his recent $10,000 deposit took two weeks to make its way into the loan market.
In addition, once a loan is made, it can't be resold, so lenders' money is tied up for the three-year life of the loan, says Wild. He views Prosper investments as comparable to junk bonds and is waiting to see if the returns are higher than such high-risk bonds before recommending the site to his clients.
Larsen says that Prosper recently introduced a scheduled transfer feature, so that lenders could transfer smaller amounts of money, limiting the amount of time it sits in a cash account without collecting interest. The company is also looking into creating a secondary market for loans, he says, though regulatory hurdles are daunting.
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