The virtual moneylender

A new Web site allows you to borrow money from strangers in cyberspace. It may even free you from credit card debt and the usurers at the local payday loan center.

By Farhad Manjoo

Read more: Technology & Business, Farhad Manjoo

May 22, 2006 | The middle-aged woman in Janesville, Wis., who recently posted a request for $5,000 on Prosper.com, an online marketplace for personal loans, chose a screen name that elegantly distills her station in life. BusyLady52 is indeed a busy lady. By day, she works for the county in an office job; at night, she's a dispatcher for the city bus line. In addition, she cares for her aging and ailing parents and a younger sister who suffered a debilitating brain injury in 1987. Yet all this work has brought neither security nor much satisfaction, and BusyLady52 now strives to crawl out from under a lifetime of debt.

In a photograph that BusyLady52 posted alongside her request, she looks positively regal, with a fur-trimmed V-neck shawl, a pretty necklace and a bright smile. The effect is endearing, and the picture, together with a short note explaining her situation, signals authentic desperation. Like many of the listings on Prosper, this one seems to whisper, Will you take a chance on me?

Prosper is a marketplace brimming with woe. In this respect it is not so different from a dating site, except that on Prosper people are looking for money, which is immeasurably more useful, and often harder to come by, than love. Love will sometimes find you in the dark when you least expect it, and change your life. This almost never happens with money. If you aren't born with it, there are really only two legitimate ways to get it: You work for it, trading your time and effort, or you borrow it, putting on the line your reputation, assets and future income. For vast numbers of Americans today, the first option simply isn't working out, and the second choice -- borrowing -- has become a way of life. The problem isn't just record debt, but also the terms. Credit cards offer rates that are fluid and unpredictable, with high fees and little sympathy for hardship. Worse still are payday loan centers, which lend out money at obscene rates -- 400 percent or more on an annual basis -- yet have become a necessary crutch for many.

Prosper bills itself as an Internet-age alternative to such creditors. The system, which has been in operation since February, is at once ingenious and faintly surreal; its premise is that strangers -- lenders and borrowers -- will come together to execute meaningful, serious and risky transactions in a self-consciously anonymous environment, not unlike the way buyers and sellers do business with each other on eBay. If they succeed, "person-to-person" lending sites like Prosper -- competitors are coming online soon -- could upend the credit industry, bringing transparency and fairness to a market not known for either. Borrowers who've been shut out of the loan market find money at reasonable interest rates, and people with money to lend get a return that can surpass that of other investments. Prosper, which manages the loan, takes a small cut of the deal. (Borrowers pay 1 percent of each loan and lenders pay .5 percent on the money owed to them.)

There is much to question about this setup. Critics and skeptics wonder about the risks involved for both borrowers and lenders, the site's adherence to equal-opportunity regulations, and, most important, the very logic behind its operations, the idea that people with money will actually lend to people in need, especially to borrowers who have poor financial records. Yet the idea sounds intuitively attractive to many who follow the credit industry and are familiar with its pitfalls. "Looking at it from 10,000 feet, this is a great idea," says Elizabeth Warren, a professor at Harvard Law School who's an expert on bankruptcy law. "It could have the wonderful effect of making markets work the way they should, driving down the amounts charged for loans to the true marginal cost."

Warren suggests that Prosper is much more than a novel Web site -- it's an example, she says, of one of the ways the Internet might transform the credit industry into a fairer, more equitable business. "There are things going on in the lending industry that if it were transparent would never occur," she says. At least in theory, sites like Prosper hold the potential to free many in the middle class from the stranglehold of credit card debt and to give low-income Americans a way out of the debt traps laid by unseemly payday loan centers.

Another intriguing possibility is that Prosper can help instill financial discipline in people who've had trouble with money all their lives. Warren points out that one of the questions that people who study debt and bankruptcy in America wrestle with is "whether anyone should be lending money to people who are already in financial trouble." The answer would seem to depend on the borrower. For some people in debt, a little bit of money offered at a reasonable rate can set the world right again, while for others, as a wise man once said, mo' money, mo' problems. But determining which borrowers can be saved from those who are simply undisciplined is a labor-intensive task, and mainstream creditors -- credit card firms and payday loan centers -- hardly make the effort. They charge everyone a high rate with the expectation that some will default, and others will live forever in lucrative, revolving debt.

The virtual world of Prosper offers a far more personal experience. Trading money on the site is an intensely social activity, in which lenders sit in constant judgment of the most intimate aspects of borrowers' lives, scrutinizing their financial histories and making public guesses about their responsibility. Successful borrowers, meanwhile, must convince lenders to part with their money, not only by disclosing their finances, but by pleading their cases directly, promising to work harder at managing their money.

And the process seems to be working. Many of the lenders on Prosper, for instance, know almost nothing about BusyLady52, not even her name (which she asked me not to publish). What they do know about her (a middling credit score, a couple of current delinquencies) is the sort of thing that would render her ineligible for a traditional loan. Yet lenders saw in her story some spark of genuine responsibility, a possibility that she'd do well if given a chance. More than 50 people got together to give her a total of $5,000 at a 16 percent rate. She now says she's determined to set her money straight again, if only to prove herself to those who invested in her. "Grateful?" she says. "When I got up this morning and saw the money in my account --- oh, you have no idea."

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