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The Basics

Prosper.com: An eBay for loans

Such peer-to-peer Web sites cut out the middlemen -- the banks -- by connecting borrowers with people willing to lend. Despite deadbeats, lenders say they're making money.

By SmartMoney

Greg Bequette, a slow-speaking man with a sly sense of humor, is an accounting specialist with the University of California, a volunteer firefighter, an amateur genealogist and not-so-born-to-be-wild biker. As if that's not enough, a while back he added a fifth avocation to his repertoire: banker.

Since mid-2006, Bequette has lent hundreds of thousands of dollars to strangers around the country, including $1,338 to a goatee-wearing salesman to buy an engagement ring, $6,211 to a California woman looking to market her "all natural" skin and nail supplement, and $3,000 to a Kansas City, Mo., couple to upgrade their tanning salon.

His clients call him "Pensioner" -- that's his handle on Prosper.com, a Web site that serves as a sort of eBay for loans. On Prosper, folks ranging from teenage moms to CEOs post listings on the site explaining why they need to borrow money; consumers looking to make loans bid with interest-rate offers as high as 30%.

'More fun than picking stocks'

Bequette fell hard for the concept when a co-worker showed him the site last summer. He loves analyzing borrowers' credit data and reading their colorful essays. "It's even more fun than picking stocks," he says.

By fall 2006, he'd cashed in his mutual funds and lent half a million dollars, including $4,800 to a beef-jerky maker and $12,000 to an Alabama pet groomer. When that stash was gone, he got a $250,000 second mortgage and lent that out, too.

At first, everyone thought he'd lost his mind: "My wife was almost angry," he says. "But now she sees the money rolling in."

His interest rates are high -- 24.5% on average -- and he's earning a 15% return after accounting for bad loans. If all goes well, Bequette, in his mid-50s, hopes to retire on his pension and Prosper earnings -- he imagines himself lounging on a cruise-ship deck with his laptop, managing his online loan portfolio.

Bequette's investment strategy may sound odd, but he has lots of company. Since Prosper launched last year, it has attracted more than $35 million in loan deals. And no wonder: With no bank playing middleman, lenders earn higher interest rates than they'd get on a bank deposit; the sitewide return, after accounting for loan losses, is reportedly 7.5%.

Most lenders fund $50 and $100 portions of larger loans, so if a few of those loans go bad, it's not the end of the world. Then there's the sheer entertainment value of the site. Not only do would-be borrowers post detailed credit and income data, many include photos of themselves surrounded by grinning children, floppy pets, U.S. flags and, in the case of one biology student seeking help with tuition, a dissected lab rat. Some write long essays detailing their dreams for the future and oh-so-good intentions.

Prosper's mostly male discussion forums, meanwhile, are packed with gossip, analysis, tips on female borrowers with hot photos ("her credit information looks amazing!") and sarcastic screeds ridiculing the day's most absurd loan requests.

The man behind all this is Chris Larsen, a mid-40s entrepreneur with the low-key confidence and pleasant visage of an airline pilot. He dreamed up Prosper in the late 1990s, when he was running E-Loan, a consumer-friendly online mortgage outfit (it was the first to give customers a peek at their credit scores).

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With Prosper, Larsen hopes to combine the efficiency of data-based lending markets with the social pressure found in informal, trust-based Asian lending networks. Will it take off? Not surprisingly, banks say consumers are happy with the wide selection of loan products already on the market.

Though Dan Schatt, a banking analyst with financial-services research firm Celent, predicts peer-to-peer lending sites will account for $5 billion by 2010, that's little more than a rounding error in the $2 trillion U.S. consumer-loan market. But Larsen, never one for excessive modesty, says outfits like his may someday displace banks as the middleman in personal loans.

'Basic concept is appealing'

He's sharply critical of the banking industry and thinks consumers are hungry for an alternative. "You should be able to sell your money directly to people who want to buy your money," he says.

Many people agree that it's a clever idea. "The basic concept is appealing," says Jack Guttentag, a professor of finance emeritus at the Wharton School. "It brings lenders and borrowers together and takes the hassle out of it."

But the first year was bumpy. Lenders testing new strategies often suffered disappointing results; some were shocked by borrowers who never made a single payment. Critics say borrowers don't seem to feel especially beholden to lenders they've met online. And just about everyone complains that there aren't enough decent loans to fund. So far, Prosper is more of a giant banking petri dish than a threat to conventional lenders. "It's an experiment," Bequette acknowledges.

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