Tuesday, August 1, 2006

Every day Keith Wittenberg goes online, searching for attractive listings. But he is not in the market for collectible baseball cards or a cell phone, nor is he scouring eBay for random junk. He's on Prosper.com, looking for people in need of his money.

America's first people-to-people lending marketplace was launched by E-Loan co-founder Chris Larsen, who raised $20 million for the venture and got it underway this past February.

The site behaves much like eBay, in that people hoping to borrow money can create a listing with photos, a description and the interest rate they're willing to pay.

Prospective lenders search the site for a loan option that offers enough interest to compensate for the risk of sending money to strangers.

Wittenberg, a radiologist and father of three in St. Paul, Minn., made his first $50 bid in early March. Less than four months later, he has lent a total of roughly $24,000 cash loans to about 120 people.

He lent $75 to a mother and special education teacher in Laguna Beach, Calif., who dreams of becoming a lawyer and requested $5,500 to go to the dentist, consolidate credit card debt and pay off a payday loan. She received 100 percent of the requested amount from 12 bidders, who will each earn 28 percent interest.

It's a rate most Americans consider astronomical, but for those stuck in a faxless payday loan cycle, it's lower than they're paying now.

It may also be the only option available for consumers turned away by banks due to their bad credit or lack of collateral. Prosper's loans, by nature, are unsecured, meaning there is no house or car backing them up, and the people lending them could lose 100 percent of their money. But the risk doesn't concern Wittenberg.

"It's a good source of portfolio diversification. My (Prosper) portfolio's earning 20 percent, but it has high-risk loans," Wittenberg said.

Like investments in other markets, the greater the risk, the greater the opportunity for a big return. While it's too soon to tell whether his rate of return will remain high, a big part of the fun for Wittenberg, who has a math and economics background, is to see if he can pick out the "gem of a high-risk loan."

But he's also very aware that these are real people requesting money that will have an impact in their lives.

"I always worry with every loan, 'Am I making the person worse off?' It's not so much whether I lose the money," he said. "It's 'Am I contributing to someone else's downfall?'"

Wittenberg is one of roughly 1,000 "group leaders" within the Prosper site. The concept is that borrowers with common characteristics will join, not only reducing the rate of default but also making lenders more comfortable earning lower rates. Group leaders decide who joins, and encourage those who do to request loans. Leaders whose members pay on time earn commission.

Wittenberg, who doesn't profit from his group leader role, had hoped to help Minnesotans borrow, but that didn't work. The interest rates borrowers pay are capped by each individual state; in Minnesota, for example, the cap is 8 percent. Other states allow rates as high as 29 percent, making those loans more attractive to lenders.

It's too soon to tell whether Prosper will change the lending marketplace, and become a replacement for many people who have previously known only no faxing payday loans. There now are only 1,000 active listings on the site at a time. Within five years, experts believe there could be as many as 100,000 personal loans made between consumers in the U.S. per year, worth more than $1 billion.

Fail or succeed, Wittenberg is fascinated by the concept.

This entry was posted on Tuesday, August 1st, 2006 at 1:09 pm and is filed under National.