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

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Prosper will soon face new competition: Zopa, a person-to-person lending website that has been running in Britain since 2005, intends to open in the US market later this year. Prosper's future rival may spur improvements in the social lending industry, says Zopa's CEO Doug Dolton.

"The US market is huge; it's actually better if you have more competitors," says Mr. Dolton, since you have someone to be measured against.

Larson agrees. More competitors validates the industry, he says. But he's quick to point out that, while Zopa has released few details about how its US operations will look, in Britain, lenders aren't able to bid on specific borrowers. Instead, British lenders only choose the credit scores and length of loans. Choosing specific borrowers is a draw for Prosper lenders, many of whom see their loans not just as investments, but also as a way to lend a helping hand to those in need of short-term cash.

"It's kind of nice when there's somebody that you're helping out, and you get an e-mail from them and they're thanking you," says Vince Polizatto, a credit officer who works in Washington, D.C. "Having said that, I [made] two loans that are in collection."

Loans that are more than four months late are sold to debt buyers, and there is no mechanism for debt forgiveness. Larson adds that Prosper is not for those interested in charity.

For those who are, San Francisco-based Kiva Micro­funds joins with microfinance groups in developing countries to allow individuals to give small, interest-free loans to entrepreneurs. Since its inception in 2005, no borrower has defaulted, but if someone is unable to repay his or her loan, the complete cost of it is borne by the lenders, says Fiona Ramsey, Kiva's community and operations manager. "We don't want to create an additional burden of debt on the borrowers."

Those who are earning an 8.99 percent return lending to "Mr. Incredible" – aka Texas programmer Kevin Conner – may not get a charitable feeling from their loan, but they won't miss out on the human touch. Mr. Conner says he'll try to tell his lenders later this summer which games he buys – he's already bought a 42-inch TV monitor, he writes in an e-mail – and where he goes on vacation. "It would be good to keep those that are interested informed."

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