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Microlending - the 2.0 concept of Microcredit  

Posted by Rezwan in

Most of us know about Microcredit and how it operates. An institute offers small loans to a group of individuals without collateral and peer pressure and observation secures the proper utilization and return of the money. But what if this becomes more interactive like Web 2.0?

What if a group of individuals finance a small loan to one or more individuals instead of the institute? Prosper, a 15-month-old venture is doing just that in USA combining social networking with online auctions.

Wired News has details:

"Prosper's marketplace is a blend of eBay-like bidding auctions and social networking, and is conceptually related to the emerging world of microcredit.

Wannabe borrowers give Prosper permission to verify their identity and allow the company to access their financial data as collected by Experian, one of the three big credit-scoring agencies.

Prosper then gives the borrower a credit rating and helps match his or her loan request with a number of lenders. A $5,000 loan, for instance, might be funded by 50 people who each lend $100.

Lenders use borrowers' credit scores and other financial data to set interest rates that balance risk and return, while borrowers assemble their loans piecemeal from lenders' offers, giving preference to the lowest interest rates offered to them."
Just look at this instance:- A wife and mom is raising a loan for her daughters wedding. She needs $8000 and got 66% funded by 55 bids (persons) at promised 28.5% per annum return (figures when written).

The only question is what is the security offered by Prosper.
"To keep bad loans from poisoning the well, Prosper blocks borrowers who have defaulted on their loans. Over half the company's engineers work on antifraud measures, according to Witchel, and Prosper insures lenders against money lost due to identity theft.

Borrowers who miss payments on Prosper face the same consequences as they would if they miss a payment with any form of bank credit including the reporting of late payments to the credit bureaus. Borrowers also incur late fees, which are collected by Prosper and passed onto the people that loaned the money."
Prosper says that its the borrowers and lenders who are taking decisions, they are just providing the platform. There give no guarantee that the loan will be repaid. Their suggestion:
The way to ensure a good return on your investment is to diversify your lending—create a standing order to place bids on many listings, and spread your risk across many borrowers. Even if one of your borrowers defaults, the return from your other borrowers will more than make up for the loss.
And how Prosper is financed?
Prosper charges a 1% or 2% loan closing fee each time a loan is funded. In addition, Prosper charges lenders an annual loan servicing fee of 0.5%-1%.
Microcredit is really a revolutionary idea which is prompting these kind of extra-ordinary innovations. The conventional banking will certainly evolve as more consumer friendly in future especially targeting those who have less.

This entry was posted on May 10, 2007 at Thursday, May 10, 2007 and is filed under . You can follow any responses to this entry through the comments feed .

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