Sep 10, 2010 - 01:48 AM
NewInvestorToolkit
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Sep 10, 2010 - 01:48 AM
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NewInvestorToolkit |
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Peer-to-Peer Lending Online - Lending Money to Make MoneyProsper.com is a peer-to-peer lending site. What this means is that users log on to borrow money, and other users acting as lenders bid on the loans. When the auction time is up, borrowers get the money and pay back the loan in monthly installments for 3 years at the prevailing rate of the bids. It is a fascinating example of how the internet has revolutionized traditional lending. It's the e-Bay and LendingTree brokerage business model applied to the small loan market. Here's how it works. A borrower initiates a request for a loan, specifying the dollar amount , the interest rate and a brief description of the purpose of the loan. Prosper.com includes the borrower's Experian credit rating and debt/income ratio so lenders can more effectively evaluate the creditworthiness of the borrower. Lenders deposit funds into a prosper.com account, and when the money clears, the lender is ready to start bidding on loans. A lender may choose to bid a partial or full amount requested by a borrower. At that time, the lender specifies the minimum interest rate he is willing to accept for that loan. As long as additional lenders do not bid over the initial amount of the loan, everyone gets the borrower's initial interest rate. If lenders bid more that the initial amount, the lenders with the highest minimum interest rate get kicked out of the bidding, and the interest rate for the loan drops to that minimum interest rate- 0.5%. Bidding continues until the bidding time of 7 seven days expires. An example may help. Peer-to-Peer Lending ExampleJoe requests $3,000 at 10%.Jeff lends $1,500 and sets his minimum interest rate at 9% Sally lends $1,500 and sets her minimum interest rate at 8% If bidding were to end right there, Joe would get his money, and Jeff and Sally would both have $1,500 loans at 10% paid back monthly over 3 years. However, if Wendy also bid $1,500 with a minimum interest rate of 7.5%, Jeff would be removed from the loan, and the interest rate for Wendy and Sally would become 8.95% (Jeff's minimum interest rate -0.5%) When the bidding cycle is over, the borrower gets the money put up by the lenders, and monthly payments are withdrawn from his bank account to pay off the loan in 3 years. The monthly amount is divided and returned to the lenders' bank accounts. All in all, it looks like a good marketplace where borrowers can get loans of up to $25,000 at reasonable rates, and individual lenders can make 5-35% returns on their money. Of course, the loans are not guaranteed, and there is a risk that borrowers may default on their loans. Defaulted loans go through credit agencies and borrowers' credit rating are adjusted accordingly. Peer-to-Peer Lending FeesIn case you were worried about prosper.com, they have figured out their own methods of gleaning money from these transactions. Borrowers pay:
Plus, I assume prosper.com keeps any interest earned from lender funds sitting in Prosper accounts. If you are willing to put time into researching the loans, you could make money by borrowing money and then lending it at a higher interest rate. Obviously, the spread between the interest rates would have to cover the Prosper.com fees, but it certainly looks as some people are trying it. Here is one example of a lending investor. So, prosper.com is another great example of the online broker business model; prosper.com provides a marketplace where users can do business and prosper.com takes a percentage of every deal brokered. That being said, it may also be a great opportunity for individual investors to make money on the web. Print this | Send this | Hits: 253 | |
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Ways to Make Money Using the Web |
