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Before she heads off to work, managing her father’s restaurant in Elkin, North Carolina, Shannon Sparks logs onto the Internet and checks bids from the night before. Unlike most online auctions, the bidders aren’t vying to buy a camera, an antique or a slightly used iPod. They’re bidding for the right to lend her family’s business, the Basin Creek Country Store, $20,000 for a new point of sale system. Sparks is trying out a new funding source for restaurant owners, entrepreneurs and everyone else: a website called Prosper Marketplace or Prosper.com.

Before she heads off to work, managing her father’s restaurant in Elkin, North Carolina, Shannon Sparks logs onto the Internet and checks bids from the night before. Unlike most online auctions, the bidders aren’t vying to buy a camera, an antique or a slightly used iPod. They’re bidding for the right to lend her family’s business, the Basin Creek Country Store, $20,000 for a new point of sale system.

Sparks is trying out a new funding source for restaurant owners, entrepreneurs and everyone else: a website called Prosper Marketplace or Pros­per.com. Launched in February, the auction site hopes to do for personal loans what eBay did for merchandise. Prospective lenders are bidding to finance chunks of Sparks’s loan, in increments of anywhere from $50 to $1,000.

“It’s kind of exciting,” she says. “I went to work this morning, I came back, and I had a thousand more dollars added to it.”

At the end of a 14-day auction, the bids with the lowest interest rates will carry the day. Prosper then packages those bids into a single loan, taking monthly payments from the borrower’s bank account and then making monthly disbursements to lenders. All loans are for three years and a maximum of $25,000.

The idea is to offer both borrowers and lenders a better deal. With interest rates starting at 6 percent, lenders earn more than they would at a bank (one-year certificates of deposit now average 4.34 percent, according to Bankrate Inc). Borrowers can cut up some credit cards, where rates average 12.94 percent, and penalties can push them over 30 percent.

“Borrowers are paying too much for interest,” says Prosper CEO Chris Larsen, a founder of the home-and-auto lending website E-Loan. “There’s a big margin between what banks pay and what they charge on credit cards.

We’re looking at the unsecured credit market—traditionally, what people would use credit cards or personal loans for.”

Prosper also appeals to people who might have trouble getting a loan at any interest rate. People like Bobbi Jo King, who runs Bobbi’s Grill in Frazeysburg, Ohio. After a divorce and a bankruptcy, she’s looking to borrow $5,000 for a new grill. “When I saw the site, I thought, ‘I could use new equipment. I think I’ll put a bid in here and see what comes up.”

To boost her prospects, King has joined 38 other borrowers in a Prosper group called Second Chances. Prosper’s 350 different groups are supposed to attract lenders by using peer pressure, since one member’s default affects the whole group’s reputation. Group leaders and members can also earn rewards for on-time payments.

And loans can be for almost anything. At Café Panini in Berkeley, California, owner Lyna Lam (who is married to Larsen) set up a group for her four workers. So far, one employee has borrowed $4,000 at 13 percent to cover bills from a traffic accident. “I see it as a chance to set up a virtual credit union for my employees,” says Lam. “I can vouch for them to other lenders.”

One lender to her group, Web developer John Lucena of San Francisco, likes the idea that he can contact Lam directly. “If the Café Panini started defaulting on their loans, I know where they live. I can talk to the owners and say, ‘What’s going on here?’”

More important, he likes the notion of putting his money into a person rather than a faceless institution. “It’s the fact you’re investing in the community, helping individuals and small businesses.”

Whether lenders will do well by doing good remains to be seen. Prosper lets them choose their level of risk. They can see borrowers’ credit grades, provided by the reporting agency Experian, and their debt-to-income ratios. But with the site so new, there’s no track record for default rates. Prosper urges lenders to spread their exposure by making a lot of small loans rather than a few big ones.

Not all borrowers will prosper at Prosper, warns financial services analyst Asaf Buchner with JupiterResearch. Some can do better by transferring debts to a new credit card with zero percent interest for the first year. They might also want to visit a second loan auction site that’s coming online. Zopa, a year-old British marketplace with 50,000 members, plans to launch in the United States by June.

With U.S. consumers owing over $800 billion in revolving credit, there appears to be plenty of room for both companies, says Buchner. “It’s a new market, and few people know about it.”

Of course, there’s one other risk: that not enough lenders will cough up the cash that an entrepreneur might need. At the closing bell of their first auctions, both King and Sparks fell short, which automatically cancelled all bids. Undaunted, both are trying again. After the first day of her second go round, Sparks counted $5,149 in bids. “I’m feeling good about this one.”


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