business
T h
e l
oan z one
Peer-to-peer lending
provides cash flow
to small business
By Andrew Allentuck
IN FORT WORTH, Texas, Costco member
Neal Cornett needed to borrow $3,000 to pay
off credit-card loans that were being billed at
double-digit rates. A tech expert who knows
his way around the Internet, he had heard of
the possibility of borrowing without going
through a bank or other conventional lender.
“My bank wanted 14 percent for a signature loan, but when I checked the Web for
what are called person-to-person loans I
found I could get a loan for a lot less. I went
to the Web site run by Prosper.com, asked for
a loan and got it at what turned out to be 8
percent,” Cornett explains.
“I provided some personal details, they
confirmed my credit rating and we did the
deal. The service is great, and it is really better
than a bank. The lenders are people who take
a chance at helping other people, admittedly
with a good return. It is a kind of mutual-help
network, and everybody who participates
becomes a little better for it.”
22 The Costco Connection NOVEMBER 2008
Peer-to-peer lending, P2P for short, is a
new force in finance. It eliminates the middleman—usually a bank, credit-card or finance
company—and makes it possible for borrowers and lenders to meet. Through companies
such as San Francisco–based Prosper, strangers can make a deal on an exchange of money
for a defined period at a specified interest
rate—a loan, in other words.
“About two years ago, we decided to create
a market for loans,” says Chris Larsen, CEO of
Prosper. “We saw the market—we estimate
about $2 trillion in total credit-card and personal loans in the U.S. originated each year—
and realized that folks should be able to get
credit and to make loans without going
through traditional companies that make
enormous profits with other people’s money.”
The peer-to-peer process
Here’s how it works. Assume that Fred
needs $10,000 to buy new office equipment.
IMAGEZOO
The supplier of the equipment will finance it
at 15 percent per year on the unpaid balance.
Meanwhile, Cynthia, who has never heard of
Fred, has $10,000 that she wants to deposit
and earn interest. Her problem is that the 3
percent her bank is offering in what it calls a
“high-interest” savings account will barely
keep up with inflation, even before she pays
tax on interest earned. If Fred and Cynthia
can meet, they could make a deal. If they can
agree to do a loan at, say, 9 percent, Fred will
save 6 percent on what the office equipment
company wants to carry the debt and Cynthia
will get 6 percent more than she would at the
bank. It seems like a good deal, but there are
no guarantees. If Fred does not pay, Cynthia
loses her money.
For protection, the P2P companies use
conventional collection techniques on behalf
of the lender and report defaults to credit-rating agencies in the event that the borrower fails to make timely payments and
