Sunday, July 22, 2007

Neither Borrower Nor a Lender Be?

"Neither borrower nor a lender be
For loan oft loses itself and friend,
And borrowing dulls the edge of husbandry." - Lord Polonius, Hamlet

Hello everyone.
Some of you may recognize that quote from one of Shakespeare's tragedies, Hamlet. For all of his acclaim and literary genius though, Shakespeare was no businessman. And neither was Lord Polonius. In fact, I'm going to come out and say that both were completely WRONG on the issue of debt.

Here at Gen Y Financial Freedom, we believe that credit card debt is one of the worst forms of debt. Anyone (including myself) who's ever had credit card debt knows how it can destroy your monthly cash flow and seem like a regenerative eight headed beast. As soon as you try to cut some of it down, it comes back with full vengeance, unless you're vigilant about its destruction.

But here's where Prosper.com comes in. Prosper.com, or Prosper, as it's often referred to, is a site that connects people who are looking for loans with reasonable interest rates with people who are willing to lend. At first, I was extraordinarily skeptical about this whole concept. I thought it was just a few private lenders teaming up to charge people in dire financial straits predatory rates. After doing a little bit of research, I've found out that this is not the case.

So how exactly does Prosper.com work? Well, when you sign up, you have the option of borrowing or lending. As a borrower, you have to pass a background check, submit a credit report, and follow a few extra steps. But it's relatively simple. After you've created a profile, you can specify an amount you would like to borrow, the maximum interest rate you'd like to pay, and the reason you need the cash. You essentially add a human element to the normally cold and actuarial process of obtaining/providing credit by using Prosper.

Some borrowers are people who have lost their jobs, incurred medical bills while uninsured, and would like to pay off high-interest credit card debt more quickly by using P2P (person to person) lending. Some borrowers are people who would like to start a new business with a social emphasis. Socially-minded lenders can charge a lower than market-rate interest level because the social return to them is greater than receiving a great interest rate or return on the initial investment.

How does this work for lenders though? Well, after you sign up and answer a few questions, you deposit a certain amount of money into your Prosper account. This amount can range from $100 to $25,000. It is better to make 10 $100 loans to people as opposed to one $1000 loan to a single borrower for purposes of diversification. (I would like to remind you that borrowers, not lenders, set the maxium rate at which they will borrow. So there's no loan-sharking, arm-twisting, or usurious activity.) After an interest rate is set, and the loan is funded, the money disappears from your account and every month, a predetermined amount of principal and interest (i.e. $150, $200 - depending on the interest rate and the amount of the loan) appears in the bank account the lender specified.

Lenders have the ability to view a borrower's credit rating (the potentiality for default on payments) and most importantly, if someone doesn't pay you, you're not out-of-luck. Although you would hope that it doesn't come to this, a borrower's late payments to you as a lender, are reported to credit bureaus. This mostly eliminates the prospect of fraud in the whole process. Lastly, there are many great causes that can and should be financed on the site. I've seen one borrower advertising for a loan to start a company that distributes potable water to those in less wealthy countries. There's also a community aspect to the whole process. Borrowers and lenders are rated by the communities that they belong to and how well processes involving these parties have gone.

I plan on using $1000 of my own money to lend. But before you jump into this, I advocate you doing your own research and making sure you are comfortable with the whole concept of lending/borrowing with Prosper. Also, Prosper's website has some links to press releases about its history and its founder. Just go to www.prosper.com to learn everything you want to know. Thanks for reading and until next time...

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