Thursday, May 18, 2006

Peer-to-peer financing: Back to the future?

An interesting article on InformationWeek talking about a new (or is it old?) way of loaning money:

Peer-to-peer finance sounds like a concept born to be ridiculed. Finance demands oversight and networking through peers rather than a central authority, suggests a fundamental rejection of institutional scrutiny.

Call it a cautious rebellion. In February, Prosper opened what it calls "America's first people-to-people lending marketplace." It's a site that helps users borrow and lend money among themselves without the involvement of banks. Though the company says it hasn't been around long enough to disclose its user base, it claims to host over 1,000 active loan listings and 800 active groups.

"The tools and technology that are in place now for the first time allow for this sort of direct person-to-person marketplace," says Larsen.

This goes back to the way things used to be, Larsen explains, when one neighbor supported the business of another neighbor. It's a model that, he believes, has a lot to recommend it. "There was a really strong sense of obligation and accountability and reputation within a small community," he says, "which actually made repayment of debts more reliable and less risky."

The idea advanced by these companies is that by eliminating the middleman--banks--individual lenders, or groups of them, earn a higher rate of interest than conservative investment options such as certificates of deposit, and borrowers get a lower rate of interest than would typically be available from traditional financial institutions.

This could be an option for those people that don't like the current market trend of banks securitizing their loans and selling them on to investors, thereby disconnecting the borrower from the orginal community based lender. It probably won't be a big market, but it is always good to have options.

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