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An interesting article on American Consumer News ("Is Lending Money on Prosper.com Competitive With Other Investments?") got me thinking about Prosper.com and their business model.

Prosper.com in effect provides a brokerage service for allowing individuals to make loans to other individuals. You can take your money, and rather than invest it in a mutual fund, or savings account, you can loan it to someone else at rates up to 35%.

Prosper.com - Good

Now this in and of itself isn't bad. Prosper.com is providing a service that would otherwise be filled by less reputable avenues (payday loans, credit card shuffles, and even possibly loan sharks). The people that come to Prosper.com know what they're getting into and everyone involved is a willing party. Loans are made with set rules, and no one is coerced into either loaning or taking the money. Not bad.

Prosper.com - Bad

The business model itself isn't bad or evil, but I have a personal misgiving that Prosper.com is promoting the one thing in America that is ruining more people's lives; out of control credit and spending.

Many of the people that come to Prosper.com are looking for a 'new start'. But the reason that they have to come to a site like Prosper.com is because undoubtedly all of the normal financial avenues have already been tried and they have probably been turned down for similar loans.

This would disturb me on a couple of levels if I were loaning money through Prosper.com.

   Individuals that Aren't Credit-Worthy - I know that the people that run banks and financial lending institutions aren't dumb. By no means. Anyone 'dumb' running a bank doesn't run the bank for long. So if these intelligent people, who remember, DO THIS FOR A LIVING decided that these people are too much of a risk to lend money to. Count me out.

   Taking Advantage of the Financially-Challenged - Many of the people going to Prosper.com are trying to turn their financial lives around. But the way some of them are doing it, by consolidating their debt via (effectively) a private-party signature loan causes a lot of red flags and warning klaxons to go off. I'm all for helping people out of debt and getting control of their financial lives, that's what this blog is all about. My problem with Prosper.com is that it feels a little too much like helping an addict by continuing the addiction. As a person preaching against getting into too much credit debt, I would have a hard time sleeping at night participating in the Prosper.com business.

Not everyone can turn their lives around on a dime. but consolidating loans to ~30% interest rates doesn't seem to be a great improvement in my book. You just change the person on the other end of the shackles that hold you in financial slavery.

Thanks, but I'll Pass

Prosper.com hasn't convinced me that it's beneficial enough for either the loan originator or the loan recipient for me to seriously consider getting involved with it.

As far as I'm concerned, Prosper.com is an alternative to things like bankruptcy, super-high interest credit cards/loans, and other dead-end financial mistakes. They also aren't at the level of the payday loans places.

Yet.

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