Prosper (2 of 3)

Back again to talk a little more about Prosper.com, the on-line person-to-person lending operation. Today, I want to address borrowing through Prosper.

Obviously, the largest attraction for someone looking to borrow from Prosper is the hope that the bidding process will produce a lower rate then they could have gotten anywhere else. This is, by and large, true. After all, many people on Prosper are investing there because the low ($50) start-up costs are within the small-time investor’s reach, so many investments only need to beat out a savings account to be more profitable.

For some with bad credit, or worse a misleading credit history, Prosper offers a place where you can plead your case on a more human level. Unlike a bank, which is run centrally and has high overhead costs, the people on Prosper are more willing to look past the statistics and listen to the story. For borrowers who are genuinely on hard times, but are willing and able to put the work into paying off the loan, this is a unique opportunity. (Unfortunately, if you choose to borrow, realize that the personal nature of Prosper also makes it an easier target for scam artists, so lenders may seem doubtful. I recommend not taking it personally and instead realize it is part of the partnership that makes Prosper work.)

I will say only a few things about Prosper’s downside for a borrower, because the possible downsides are few. First, all loans on Prosper are three years. Unlike a bank, where you may be able to find a longer-term loan for a large amount, whatever you borrow will have to be paid off in three years. However, I think this can be beneficial; with only three years of interest, you save money over a longer term loan, and get out of debt more quickly.

The larger problem I would caution you to consider before signing up is that, when you ask for a loan, you commit to paying it without knowing what the final interest rate will be. Clearly, you would never take that chance with a bank, but as with any bidding site, it is unavoidable. As anyone who has used E-Bay knows, you have to start the bidding with the price the bidder wants, and hope the bidding brings it towards what you want. There are ways to protect yourself, however. Look for loans similar to yours. Watch the bidding. Would you be satisfied with the final rate, or would it break your bank? If the rates on comparable loans are far outside what you can afford, you might want to consider something else. Also, as an extension of this, carefully consider where you want to start the bidding on your loan. Like E-Bay, you set the initial interest rate and people bid down. Always choose an opening rate that you would be happy with and can pay off. In that way, you protect yourself and your situation can always improve. Do NOT start with a high interest rate meant to attract bidders, because this may end up being your final rate. If your rate is too low and not enough people bid before the application expires, you may be disappointed, but at least you wont be tied to a long, expensive loan.

So, my recommendation? Do the research and see if Prosper is right for you. In many ways, there is less control then taking a loan with a bank, and it can be dangerous is abused. However, you may also get a great rate. Used responsibly, I think Prosper could be a huge help to people looking to eliminate debt. My mom is looking into consolidating her debt on Prosper because her great credit report doesn’t get her nearly enough respect from credit card companies.

Come back for part three, where I’ll discuss the community service implications of prosper.com.

P.S. Anyone who found this helpful and decides to pursue a loan, please use the link at right. By citing me as your referrer,¬† I receive 0.5% of the loan. No worries! I’m taking a piece of prosper’s share, not adding to the cost of your loan, and you can put the money toward supporting a blog I hope you love.

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