What if people could borrow and lend money to each other without any banks in the middle? That's the idea behind two-year-old Prosper.com.
"What we're really trying to do is to create an eBay for money and credit," says chief executive Chris Larsen, who founded E-Loan in 1997 and then sold it in 2005. "This is just another step in the road of taking the power out of the hands of a small group of elites and putting it into the hands of everybody else."
The idea melds the debt market with online social networking. Lenders can log on to browse a list of prospective borrowers, and fund all or part of the applications they find intriguing. Since its founding, Prosper has facilitated the funding of more than $120 million in loans, averaging just over $6,000 each; in 2007, loans averaged $7,000. Prosper makes its money by charging fees to both sides of the deal.
Borrowers include stretched homeowners, college-goers, credit-card junkies, and entrepreneurs; lenders are average folks, including Larsen himself, who has funded more than 450 loans. Intriguingly, with the credit crunch making it tougher on small-business owners to get capital to expand, more entrepreneurs are turning to Prosper as an alternative, posting business plans and photos as part of their pitches; these loans now account for about 20% of funded volume.
As with eBay, borrowers and lenders never meet, and they often don't know who the other is. But borrowers' credit grades (based on their credit scores) are public, helping more qualified borrowers get access to capital that might not otherwise be forthcoming and get better rates even if it were. So far, Prosper's lenders and borrowers are only in America, but a new joint venture would let Japanese lenders bid on American loans—and the goal is to connect people (and capital) globally. Says Larsen: "The ultimate model puts together global efficient social capital with market efficiency. This is the groundwork being laid."