Released: October 15, 2007

Peer-to-peer lending: a solution for strapped consumers

Source: Aleksandra Todorova , Smart Money

A YEAR AGO, Nicole Newberry was in a financial hole so deep that she had trouble making the minimum payments on her credit cards. Worse, the then 22-year-old had gotten tangled up in the predatory cycle of payday loans. Every two weeks, when she repaid the two loans she owed, she borrowed the money right back to pay for groceries and diapers for her two toddlers. Her predicament was cruelly simple: “Each month, I was making all these minimum payments and getting nowhere,” she says.

Then a co-worker told her about Prosper.com, a peer-to-peer lending web site that facilitates loans between strangers. Consumers seeking a loan list the details of how much they need and why, while those with cash to spare scour the listings and make loans to the ones they choose. Generally, borrowers get lower interest rates than they would with a bank or credit card, while lenders can earn better returns than they would in a money market or savings account.

Within 10 days of posting on Prosper, Newberry received a $9,000 loan at 19%: Enough to pay off the pesky payday loans and all her credit cards, which at that time carried 25% to 27% interest rates. As a result, her monthly payment dropped significantly, to $330 from $800 before consolidation. Her credit score, once a subprime 580, is now 680 and steadily rising. And then there’s the 1,800-square-foot icing on the cake: Three months ago, Newberry purchased her first home, a four-bedroom house in Sacramento, Calif.

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