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A new way to finance your remodel?

ProsperWould you lend this couple money to pay off their kitchen cabinets? More than 200 people bid on the opportunity to do just that. Check this out.

This couple and the unique solution to their high-interest cabinet debt are yet more indications that the Internet has changed everything.

As part of a new phenomenon called people-to-people lending, a website called Prosper.com allows you to borrow money from a group of lenders. Not a group of banks, mind you, but a group of people. Need a new kitchen? Or to pay off your high-interest Home Depot credit card? Or to add a second story for your larger family? These are some of the reasons for which people have requested loans on Prosper, in addition to consolidating debt, buying a Harley-Davidson, starting a business and financing all kinds of adventures. (Seriously, go the website now and read these stories! They're fascinating!)

Here's how it works: You sign up as a borrower on the secure website, which pulls your Experian credit report and then assigns you a credit grade from AA to HR (high risk). You must have a credit score 520 or above to qualify. The higher your rating, the more likely you are to get your request funded, and the lower the credit rate you will pay.

More after the jump . . .

To apply for a loan, you state how much you need (from $1,000 to $25,000), what you need the loan for, and why you are a good person to loan money to. You also state your income and expenses, and your listing includes your non-housing debt-to-income ratio.

When you create a listing, you can include a photo of yourself, your family, or the thing you need the money for. But it is all anonymous (unless you choose to reveal your identity). You also state the interest rate you are willing to pay.

Once your loan request is listed, the people who have registered as lenders read your information and decide if you are a good risk and if the rate you are offering is a good deal. They then "bid" to fund your loan in small amounts, usually from $50 to $100 or more.

During the bidding, potential lenders can ask you questions, and you can get endorsements from other Prosper members. If enough lenders want to get in on your loan and earn more than they could from many other investments, your loan is funded. If even more lenders bid on your loan, the interest rate can go lower. (It’s a little complicated.) You typically have seven days to get fully funded. If not, your listing is cancelled. And there are things you can do to increase your chances, which are discussed on Prosper forums. Prosper makes a small percentage for the loan from both the lender and the borrower.

Every funded loan is amortized to be paid off in three years. The monthly payments are taken out of your checking account by Prosper and distributed to the lenders. If you default on the payments, Prosper make the normal collection efforts, and your default can be reported to the credit reporting agencies.

So, from a non-business-major person like me, that would appear to be the weakness in this whole lending phenomenon. If the borrower does not pay up, you could lose money, and that’s why small amounts of money are loaned by each lender, to spread out the risk.

But here’s a neat use of this process. Let’s say you want to borrow $25,000 at 7% interest from your parents to fix up your house. If it’s done through Prosper (you make your request and your parents grant the loan), then Prosper collects your monthly payment, rather than your parents, and eliminates the fuzziness that can happen with old fashioned person-to-person lending.


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