Bidding wars

It's Only Money

Bidding wars

The loan business gets personal

By Brittany Kress

When Dad covered the cost of your first tire change, he was only joking about charging interest.

But things are different now. Those friendly loans once exchanged between neighbors and family have risen to a whole other level — the internet.

Need money? Got some to spare? Take a peek at peer-to-peer loans.

This new, online lending format is part money, part social networking. And it's all an effort to give people better alternatives to bank interest rates — peer-to-peer rates run anywhere from 3.75 to 30 percent.

Zopa.com CEO Doug Dolton calls it "the democratization of finances," and Prosper.com CEO Chris Larsen calls his site an "eBay for lending."

The major sites — Lending Club, Prosper, Virgin Money and Zopa — vary widely in their own pitch, risks and requirements. Generally, though, for those looking to borrow, the process involves identity and credit checks followed by creating a profile and putting a plea out to bid. That usually means letting people know who you are and what you need the money for: "I just got married in June," or "I need some cash to cover a fence for the backyard."

Some sites turn around financing instantly; others stay open for several days.

Lenders review profiles and pick who they'd like to help. It could be because they live in the same city or share a common interest with the person, or maybe because they appear a safe risk.

On sites like Prosper, lenders "bid" on how much they'd like to loan and at what rate; those with the lowest rates "win" the loan.

Usually, multiple lenders' loans are combined to cover each request, and the term lengths vary as set by the borrower. Also watch for the fees most sites have for both parties.

But you're smart enough to know that with interest rates near 30 percent, fees aren't the only catch. More important is that no matter how responsible someone appears on their profile, you never know if they'll default on their loan.

Sites, of course, have their own safeguards and suggestions — like that investors dole out lots of small loans rather than one big one, or even that they know the borrower.

"In times when things are kind of tricky, people look for things that are secure and safe," said Dolton, whose Zopa site keeps borrowers' and lenders' funds separate by issuing credit-union CDs to investors and allowing them to choose who their investment will benefit, no matter how that person handles their loan.

Prosper's seen a dramatic increase in members in the last year, CEO Larsen said — and the concentration is still out West, where many of the companies are based. After all, shaking up the traditional banking model is a lot easier given the economy's state.

"You're seeing a lot of what were traditionally viewed as credit-worthy people ... they have really been in many ways cut off because of the way banks have been retrenching," Larsen said.

July 31, 2008