Would You Trust an Online Stranger for a Loan?

April 24, 2006 — -- If it's not a good idea to lend money to a friend, what's the advice for borrowing money from a stranger?

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Some have received funds that traditional lending institutions denied them by going an alternative route and forming alliances with anonymous lenders on the Web.

When Nora Penic applied for a bank loan to buy a $2,700 chocolate fountain for her fledgling catering business, she said bank officials showed her the door.

Penic had previously declared bankruptcy after running up $250,000 in medical bills for open heart surgery, leaving her few options for obtaining a bank loan.

"They really don't look at the person, at the human factors," Penic said. "All they look at is the numbers."

Put Your Trust in Strangers

Until recently, the only alternative for someone who couldn't secure a loan from a financial institution was to borrow money from a credit card at a high interest rate.

Prosper.com has provided an alternative by allowing prospective borrowers to appeal directly to the public for help.

Those looking for a loan post their credit scores on the Web site along with a description of why they need the money and how much interest they are willing to pay on the loan.

Then anonymous lenders make offers to the borrower indicating how much they'll provide, and then both parties agree on an interest rate.

"I think what we're trying to do here is say, if you leave this to people they'll do better than institutions can," said Prosper.com's CEO Chris Larsen, who compares the site to eBay.

Among the hundreds of lenders is one who has already made 140 transactions worth $22,000 at an average interest rate of 22 percent. "I'm very partial to the quirky business needing a little help," Jane Boon said.

And unlike the banks that rejected Penic, Boon wasn't concerned about Penic's credit history.

"People fall through the cracks all the time, and she seemed sincere in trying to build herself back up as she got better," said Boon.

Even with that positive outlook, Boon is aware of the risks. "There's no assurance you'll get paid," Boon said. "None whatsoever."

Not everyone's a fan. Certified financial planner David Mendels said Prosper.com's lending process is more like gambling than investing.

"If I walked up to you on the street, and I said here's a copy of my credit rating, would you like to lend me $10,000, chances are I'd have a hard time getting any money out of you," said Mendels.

Penic concedes it's a giant leap of faith. "You're asking for money from absolute strangers, and strangers are willing to give it to you," she said.

Thanks to the kindness of strangers, Penic said she now has money for her chocolate fountain from a loan with a 15 percent interest rate.