For many budding entrepreneurs, the only thing standing between them and their dream is the issue of capital. Even a few thousand dollars can make a huge difference for someone who is unable to secure a bank loan, but where else can these hopefuls turn? Jean discusses the answer with Chris Larsen, founder of E-Loan and creator of a new online lending business, Prosper.com.
Chris says that where E-Loan connects borrowers with banks to acquire loans, Prosper.com, which is modeled after consumer auction sites, links borrowers with individual investors. "People looking for an investor can post a listing, and any American can decide if it's a good investment for them," he tells Jean. It's appealing to many people, Chris says, because borrowers can find lower interest rates, while investors may often reap higher returns.
Prosper.com works for many borrowers and lenders because it's a safe, easy place to trade money, according to Chris. Borrowers are required to post their credit scores, which investors can then use as criteria when determining a good investment risk. From there, Chris explains, lenders can choose to focus their money on certain groups, such as college alumni or women entrepreneurs, or to diversify by lending to many different borrowers.
While there is always the risk of a borrower defaulting on their loan, Chris tells Jean that Prosper.com assumes full responsibility for the consequences, including collection duties, late fees and reporting the default to credit bureaus. He also explains that many lenders choose to spread their money around in many small loans, rather than one large loan, lowering their risk of default.
Chris says he hopes that Prosper.com will help promote microlending in the United States. Chris also says the site is a good choice for borrowers because it really puts them in control. They can set the maximum interest rate they're willing to pay, leaving it up to an investor to decide if the rate is appropriate.
Another benefit to borrowers, Chris explains, is the effect on their credit rating. Currently, if a borrower applies for a loan from a bank but is turned down, it shows up as an inquiry on their credit report, which can lower their rating. With Prosper.com, Chris explains, a borrower's posting isn't considered a loan inquiry. If a loan is received, but defaulted on, that will be reported and count against a borrower's credit rating.