Client News
Usury for Beginners (Prosper.com)
Jonathan V. Last, Wall Street Journal
April 6, 2007
Of all the wonders that the Internet has brought us, none is as special as Web 2.0. The next generation of Internet empowers you, me--some might say We, the People--to click our way to self-actualization. We're an Army of Davids, taking the world back from the corporate Goliaths, one Web site at a time. The new Internet lets us be who we've always wanted to be.
Yes, we all have lofty goals, like helping the infirm, reaching out to shut-ins or starting a catering service. But what we've always wanted to be may seem, to some, a bit less commendable. For instance, I've always wanted to be a loan shark. There's something luridly poetic about outlaw lending: Getting the juice ticking at 30% on some hard-luck mope; making profits off of the backs of the union guy who lost it all at the racetrack, or the stockbroker with the expensive drug habit; sending minions like "Bobby Bats" out to do collections. It's like being a banker, only cooler.
Thanks to Prosper.com, my dream has come true, sort of. Prosper was launched in February 2006 by Chris Larsen and John Witchel, two Silicon Valley entrepreneurs. Mr. Witchel was the brain behind FlashMob computing, a process that links personal computers, allowing them to function as one supercomputer. Mr. Larsen was the founder and CEO of E-Loan. They wanted to merge the fundamental principles of Web 2.0 with the trendy economic theory of microcredit. I wasn't daunted by the fancy, Nobel Prize-winning idea though. I was sure Prosper would help me find some sweet action.
The idea behind the site is that people can serve one another's financial interests better than banks can. So if you need a small loan--between $1,000 and $25,000--you can go to Prosper.com, register and explain why you need the money. Prosper does a credit check on prospective borrowers, assigns them a credit grade and then publishes their loan request with the amount they want to borrow and the maximum interest rate they're willing to pay. Prospective lenders sort through these pitches to find attractive loans, on which they bid. Lenders propose an amount they want to give at an interest rate they are willing to charge. They can fund as little as $50 or as much as the full loan. As more lenders bid on the loan, the interest rate drops, until it reaches a floor, beneath which no lenders are willing to go.
The typical loan is for a three-year term. Prosper gets its beak wet by charging a 1% transaction fee to each borrower when the loan begins and an annual 0.5% servicing fee to lenders. So far, the company has processed 8,845 loans worth more than $47 million.
Likening the concept to Jimmy Stewart's Building & Loan in "It's a Wonderful Life," Prosper bills itself as a virtuous community where people help their neighbors and everyone benefits. It's such a big, happy family that there was even a Prosper community conference last February in--where else?--San Francisco.
There are, however, two small holes in this tapestry of virtual virtue. The first is, as Prosper's FAQ puts it, "No one guarantees the loans at Prosper." If a borrower defaults, Prosper will "ding" his credit score and send a collection agency after him. But if the borrower's credit was already wrecked, that's not much disincentive. After all, collection agencies don't do kneecaps anymore. To desperate or unscrupulous borrowers with ruined credit scores, Prosper might look like free money. The other niggling concern is about unscrupulous lenders: would-be loan sharks who view Prosper as a way to leach 26% interest from poor, struggling borrowers looking for a lifeline.
I set off into Prosper territory armed with a couple hundred bucks, hoping for the frisson that my real career has never given me. After going through the verification process, I chose a screen name--"LoanBruce," after the mechanical star of Jaws--which is the only piece of identification Prosper users see about each other.
A substantial number of the listings are from people wanting loans to pay off their credit cards. Just the kind of desperate fish I was looking for. For instance, one prospective borrower requested $16,000 (at 20%) to pay off her credit cards and boost her soy candle business. Her pitch was: "Since my bankruptcy in 2002, I have not been late or delinquent on a single payment.
Some of the businesses sound rather suspicious. "AliDixon," for example, claimed to be a private investigator in California who wanted $10,000 to expand his operations. In the course of detailing his financial situation, AliDixon explained why he owed money on two cars: "Vehicle #1 is a luxury car, used to entertain millionaire and celebrity clients who expect high-class treatment from their private investigator. Vehicle #2 is a common SUV, used for surveillance operations in an attempt to remain covert." Clearly a scammer; I was too wise to fall for that routine.
Even shadier was a supposed Cornell alum, "Barry1964," who sought a $7,500 loan for the express purpose of re-lending the money out at higher rates to other Prosper borrowers. A man after my own heart.
In the end, I purchased three loans, all of which went to the type of high-risk borrowers that normally resort to getting in hock to degenerates like me. The first was to someone named "Shannon" who said he (or she) was starting a small-town newspaper. The second was to a Yahoo! employee who runs a side business selling refurbished electronics equipment.
The third was to a down-on-her-luck single mom who had no assets and needed cash to get out of credit card debt. She has an ex-husband who did her wrong, and the picture of her 5-year-old son was awfully cute. This cold-blooded loan-sharking racket is harder than it looks. I could imagine myself being tough on the first two borrowers because, deep down, I thought that there was a chance that they could make good. But the single mom seemed hopeless. I gave her the loan anyway. All told, the average interest rate I was getting on the loans was 19.84%. Not usurious, perhaps, but high enough to make me feel pleasantly evil.
After making my loans, I talked with Prosper's communications director, Tiffany Fox. Turns out, I'm just a piker with my three baby loans: While Prosper doesn't release many statistics about lenders, Ms. Fox told me that "there are more than a few who have more than $100,000 out on the platform." My career as a bad-boy money-lender was deflated even further when I received my first payments, which totaled $4.60 ($4.55, once Prosper took their cut). All three borrowers made their first collection. I didn't even get to have anyone roughed up. Not that I could have afforded it--even Bobby Bats must make more than $5 an hour.