Borrowing Money from Social Lending Networks

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Payday Loan StorefrontFollowing up on Jim’s guide to social lending networks, this is my story of doing business with Prosper, which is a lot like Lending Club. Although Prosper is in a quiet period, my experience with them is indicative of the basic social lending process, and should mirror what you’d get at other active social lending sites.

I hired a local landscaper and dirt mover last June to correct a horrible grading job in my back yard. For the basic hardscaping (dirt removal, retaining wall, and grading), he quoted $5,000. Of course, I needed the cash on hand. I looked at my local credit union first, which could go as low as 9%. Then I heard about Prosper on Clark Howard’s show, and checked it out. After registering and verifying the usual stuff, I created my loan page. Within a week, my loan had been funded.

No single lender laid out the entire $5,000. Multiple lenders pitched in anything from $25 to $1,000. My rate started at 11%, but once the loan was fully funded, lenders continued to bid on my loan and drove the rate down to 7.1%. Think of it as an eBay for loans… instead of bidders driving the price up, they drive the rate down.Everybody wins and the whole process only took a few weeks. My rate is almost 2% lower than what my credit union could provide, and lenders are getting an attractive return on their money.

You might observe that I would have been better off with the credit union if the Prosper loan didn’t bid down below 9%. Yes, this was a gamble. I was certain that my loan would be attractive enough for lenders to bid the rate down, though, as I researched comparable loans and borrowers. Folks with my credentials asking for roughly the same amounts of money were doing pretty well. I took a leap of faith, though. Thankfully, it paid off. My $5,000 loan started bidding down immediately after it was funded.

My monthly payments (roughly $155) are deducted from my checking account each month. The loan will be paid off in 2011. Right now, our back yard is over halfway finished. All the unwanted dirt (probably 40 dump truck loads) is gone, I have electrical & plumbing connections on the far end, and the retaining wall is to be built in the next few weeks. The money I’ve saved by financing through Prosper is going to come in handy when it’s time plant grass, trees, and gardens out back.

Jonathan Fowler is a freelance editor & writer. His blog, The Muse, offers a healthy mix of writing, technology, and finance commentary.

(Photo: andrewbain)

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9 Responses to “Borrowing Money from Social Lending Networks”

  1. JS says:

    Why don’t you tap the HELOC? With HELOC usually the rate will be around 4% at this moment. Plus the interest is tax deductible.

    • Phil says:

      One reason is that the loans on Prosper or Lendingclub are unsecured. If you decide not to pay back the loan, your credit would take a hit, but you wouldn’t lose your house. Unfortunately, several people on Prosper, to whom I’ve lent money, have gone this route.

      • Jim says:

        As an investor, that’s the biggest risk. People can walk away and you have to rely on the collections process, but I think the checks on the front end help reduce this from happening often. The minimum credit score, 660 I think, is at least a reasonable starting point. One thing to remember, to Fair Isaac the median score is 723 and not 575 (the midway point between 300 and 850).

    • Jonathan says:

      Phil nailed it. (I have been out of town since Friday and have been slack with blogging.) I am hesitant to put up anything against my home.

  2. Anonymous says:

    Oops it is interesting to know of such things. In the end its anyway win-win game, but certainly the bidding made your life much easier.

    • Jonathan says:

      Indeed. Having done the research, and understanding the business model, I was confident that I’d come out better in the end. I was ecstatic when the loan closed – not just for the reduced rate, but for doing my homework, taking the risk, and having it pay off.

  3. Lind says:

    I’m looking for a loan to buy out my car lease and will try Lending Club. I’d rather give my interest to other people than to the greedy banks that got us into this mess. Do you know how Lending Club’s rates compare to those from Prosper’s bidding lenders?

    • Jim says:

      Lending Club claims rates around 7.88% APR on their homepage, Prosper can’t fund loans right now until it exits a quiet period.

    • Jonathan says:

      This is one thing that attracted me to social lending…cutting out the bank. I’m already avoiding the unsavory megabanks by doing business with a credit union, but even they couldn’t match 7%.

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