Chris Larsen, who shook up the mortgage business in 1996 when he co-founded online lender E-Loan, is once again taking aim at the banking world. His latest venture: Prosper, an EBay-style online marketplace that lets individuals borrow money from one another. Would-be borrowers list the amount needed, a desired interest rate and the purpose of the loan. Prosper displays the borrowers’ credit scores and debt-to-income ratios; prospective lenders use the information to bid on loans during multiday auctions. Within a few weeks of going live early last month, the site had close to $1 million in lender capital available.
The San Franciscobased company is primarily targeting the ever-mushrooming market for outstanding credit card debt. Larsen believes that Prosper can secure lower interest costs for borrowers by going directly to individual investors, who in turn will be able to diversify their portfolios by investing directly in the gigantic consumer credit market for the first time. The company charges a 1 percent closing fee (or $25, whichever is greater) to borrowers and an 0.5 percent annual servicing fee to lenders.
“We see this as a new asset class for investors, in addition to stocks and bonds,” says the 40-year-old Larsen, who left as chairman of E-Loan when it was sold to Puerto Rican bank Popular for $300 million in November. He predicts that an average credit card customer might be able to consolidate 14 percent debt at rates as low as 10 to 12 percent by using Prosper.
Borrowers can also form affinity groups that, in theory, might secure them more-favorable terms from sympathetic lenders. Among the hundreds of groups already formed are military squads, artists, Porsche enthusiasts and English bulldog owners.
Larsen, a longtime Democratic Party supporter, admits to some altruistic motives behind his new company. The lender section of the site, for instance, tells investors that they can “help out a fellow human being by making them a loan.” But the Stanford MBA also knows that those goals won’t be achieved unless his company, well, prospers. “It’s really important for us to create something that people can make a better return on. If it’s not a good business first, it won’t help anybody.”
