Recently I was reminded by NPR (National Public Radio) to check out a website that connects lenders with borrowers in an interesting, more community-oriented way. I was so impressed that I became a lender on two different websites because I can read about prospective borrowers and evaluate the risks for myself. As I write this article I am participating as a lender in 9 loans and 7 more are pending review, so I expect that by the time you read this I will have loaned to at least 16 people. (More if you count couples!) You can borrow money through at least a couple websites and I’ll talk about one I have experienced and mention two more in passing.
Many people don’t like owing money to faceless corporations and would say there are very good reasons for that dislike. I know of many people who would much prefer to pay interest to real live human beings and if they get a lower interest rate on their debt in the process they are twice as happy. Over the last couple decades we have seen legal interest rates go up and up. That is, laws have been relaxed in many areas of the United States so that lenders can charge interest rates that faith communities, municipalities and others would have considered immoral years ago – as long as people are willing to pay those rates. Along with that are contracts that are not well understood so that a reasonable person would look at your behavior and say that you have done nothing wrong as far as they can see and yet you can still find your interest rate being raised AFTER you have already borrowed the money. When you consider the impact of fees, some people might actually be paying over 60% or more in a given year on money they have borrowed.
For people who are tired of not being treated the way they would like to be treated by lenders, consider borrowing money from a group of people. You could organize a group of people yourself, but as long as there are websites that connect lenders and borrowers, you should definitely check out the possibility of borrowing or refinancing, or even lending. I have even noticed a couple people on one website who have very nice credit ratings and they are borrowing from other lenders at a low interest rate like 7% with the purpose of lending money to others at a higher rate of interest.
When I mentioned that I have already loaned money to several people, I should clarify that I am one of a group of people who loaned a specific person (or persons) money. For example, if you need $5000, it’s possible that you could get 100 or so people to pool their money and you could get that money at 20% interest for 3 years with monthly payments of $185.82. Or, you could get $7500 from a group of 183 people at 16.16% interest for 3 years with monthly payments of $264.27. Where did I get these examples? These previous examples are from my current loan portfolio at Prosper.com.
If you have very good or excellent credit, you might be wondering, “Is 16.16% the best you can do?” At this very moment I can see that one loan that has not yet closed the bidding is for $6000 at 9.5% for the purpose of paying off credit cards. Over 200 people have combined their bids to make this loan possible and there are still over 5 days left in the bidding process. They definitely seem to be on the side of someone who wants to pay interest to people instead of credit card companies. Because of the time left I expect this borrower’s final interest rate to be between 7% & 8%, but this is just my educated guess at this point.
How does the bidding work? I’ll give 2 examples to further clarify. The borrower in the previous paragraph started out requesting $6000 at 12.48% and lenders bid a minimum of $25 per bid. Also contained in the lender’s bid is the bottom line or minimum percentage rate they are willing to accept. So, if someone bid $50 with a bottom line rate of 8%, they are still in the running because as of this moment they will receive 8.5% interest. Someone else might have bid with a minimum acceptable interest rate of 11%. Right now they are out of the running because the group of lenders has moved the interest rate (8.5%) below their minimum acceptable rate (11%).
It’s possible you are saying, “Wait a minute. You say 9.5% and then 8.5%. What’s up with that?” I’m glad you caught that because the website/company gets 1%. So if a borrower pays 9.5%, the lenders receive 8.5%. And, if you are outbid you receive an email like this one that says, “You were outbid! Listing #430639”. That listing number just came to me in real time as i write this and I followed a link in the email and re-bid with less than 3 minutes left in the auction. I can tell you right now that I bid for $26 of the loan and got it at 22%. I said I was willing to accept 21.1% just in case the interest rate dropped rapidly in the last couple of minutes.
Remember the $7500 loan? I have loaned this person $5.10 at 15.16% (always remember the company gets 1%). Now you might be wondering how I loaned so little. Well, as the loan closing came down to the wire, I was outbid on the other $19.90 of my bid! Apparently I was right on the dividing line between those whose bids were accepted and those who weren’t. Maybe if I had said that I was willing to accept 15.12% I would have had my whole $25 bid accepted, but I look at it as an interesting learning experience!
The borrower started off asking for a rate of 16.50% and ended up being funded at 16.16%. You may ask why his rate only came down a little while the 12.48% example above has dropped almost 3 percentage points and will probably drop more by the time you read this. I’m not exactly sure why, but I can hazard a guess or two. WORDS. Words are important and maybe, just maybe the guy whose rate is still dropping as I write this said what he had to say in a more effective way to reach the lenders and move them to take action. Also, I think that some people already have a group of people who might lend to them in addition to people like me who find them even though I don’t know them personally.
Earlier I mentioned that you could get a group of people together and have them collectively loan you money, but even if you have that group, the website makes it more “nice and neat”. You actually have a contract which some people aren’t used to doing between friends. Because you have a contract it may actually be easier to get people you know to register at the website and then loan as little as $25. Plus, they might find someone they want to take a chance on who is paying 28% interest or more. Having the website “hold the loan” so to speak may make a lot of people more comfortable. They may see this as more of an opportunity than simply helping a friend in need. Prosper.com is the site I use. There is also Zopa.com, but I just ran across it in a Google search today so I know next to nothing about it except I think it started in Europe.
Kiva.org is another site I use, but that is more akin to charity because you loan money at ZERO percent interest. By loaning $50 at Kiva.org and $500 at Prosper.com, I can still get a good overall interest rate for my money and help someone who might be truly living in poverty. Please keep in mind that there are no guarantees as a lender, but Prosper.com lets you know the risk associated with similar loans through their site in the past.
There are fees associated with getting a loan through Prosper, but as far as I can tell, they keep bringing those fees down instead of up. Because I have not been a borrower on these sites, I do not know if Kiva.org has a fee for the borrower, but they do ask you if you would like to make a small donation – I think it was less than 5 bucks – when you agree to make a loan. I should mention that you have to make up your own mind and I am not a lawyer or a financial advisor. You will have to read the legal paperwork in order to participate at Prosper.com. I am not taking any responsibility for the choices YOU make, fair enough? Best of luck with those loans, but why hope for luck?
In the future I will be teaching people how to make powerful requests so that they can get more lenders to bid at lower interest rates in order to lower their final loan rate. Prospective lenders and borrowers are encouraged to contact me before registering at Prosper.com.