Friday, July 13, 2007

Loan money to family and friends through Prosper

In my opinion, Get Rich Slowly is the best finance blog on the net. Today JD Roth, the author, posted a question from a reader. Tim's brother-in-law is in college and is having trouble making ends meet. Tim wants to help him out but is "not keen on the idea of just loaning him money directly." The brother-in-law just lost his job and is asking for about $10,000 to pay for his car, rent, and food. In my opinion, Prosper is a great solution. Here are some of the advantages:
  • Tim does not need to loan the full amount. He could potentially lend as little as $50.
  • Tim could endorse his brother-in-law which could help the loan get funded.
  • Tim's brother-in-law would get the help he needs but would be forced to be financially responsible and pay the loan back.
  • Tim has reduced his overall financial liability on the loan but is still fully supporting his brother-in-law.
  • If the loan listing attracts enough attention, Tim could eventually get bid out of the loan reducing his financial liability to zero.
  • Tim can earn a modest return on the money he lends to his brother-in-law, while the brother-in-law can get an interest rate as low as 6% depending on his credit.
  • The loan listing preparation would force Tim's brother-in-law to think through how he currently spends his money, how he plans to use the loan, and how he plans to pay it back.
  • The brother-in-law would learn the importance of maintaining a good credit score.
  • This is better than co-signing for a loan which could have a significant negative to Tim's credit score if his brother-in-law missed payments.
Are there other advantages I've missed? What are the disadvantages? I know that many Prosper lenders read this blog - has anyone loaned money to family through Prosper or funded part of a loan where this was the situation? What would you do if you were in Tim's situation?

If you are new to Prosper, start borrowing here.

10 comments:

Anonymous said...

I have made two loans to friends on Prosper. I would not have made either loan if it were not for the infrastructure Prosper provides. I trust both very much, but the thought of lending to them directly isn't appealing for the awkwardness of having to collect from them every month. I think you covered the reasons very well in the original post. I simply arranged for them to get a better-than-market loan from Prosper (not me) to help them consolidate. And from my point of view, honestly I view these two as the safest loans in my portfolio. In my mental accounting, they're just a couple of CD's. Win-win.

Anonymous said...

DCS - thanks for sharing the personal experience. I'm curious, would either friend have trouble getting a loan through Prosper without your help? Are they high risk borrowers? What would you do if they were in a situation where they were late or in danger of defaulting on the loan? Did you put in a nominal amount or did you fund a significant portion of the loan?

Hope that wasn't too many questions for you but I can see how things still might get a bit complicated if the borrower wasn't able to make payments.

Anonymous said...

No problem, I'll try to cover all that was asked.

* Both are very good early 30's friends who asked for my advice on getting over their 20's credit card hangover.

* One friend was an E, the other an HR. Neither had any DQ or public records, just high utilization.

* Both were willing to share a copy of their actual credit report with me.

* I believe both could have been funded by the Prosper market (with good group leadership) somewhere near or above 20%. This would have also required them to ask for a smaller amount so as to only consolidate their debt that was charging higher than that rate.

* I consolidated their entire revolving debts for around 6%. More of a favor than an investment, but like I said, I do consider it like a CD on my end.

* We're very close and they're already very open with their finances with me. In a tight month, I know they'd warn me, and honestly I'd probably offer to make a small loan so they could be on time. However, both have stable jobs and I know they've changed their financial habits, and I seriously doubt that would happen.

* $9000 on one and $6400 on the other.

* Having helped them each save what probably would have been a couple thousand in interest payments has been the most rewarding experience of Prosper so far for me.

Mike said...

I'm in the "don't loan money I can't loose to friends and family" camp, but, if I did, I'd use something like Prosper. It formalizes the deal and leaves a ding on their credit report if the deal goes south.

Mike

Anonymous said...

DSC, thanks for the info. That's very generous of you and I think gets at the heart of what Prosper should be. Everyone wins. Luckily you were in a financial position where you could loan the full amount.

I think one of the biggest advantages of Prosper is that you could leverage a small amount of money and your trust in your friends and the community could loan the rest.

Matt said...

DCS - that is interesting. I do see people sometimes on Prosper that are lending at 25% or 29% to friends and family members. DCS sounds like he is a much better friend.

Anonymous said...

Just an addendum - I showed the friend who received a loan last March as an "HR" how to check her credit on Prosper by partially completing a new loan application. She is now an "A" 0/0/0! She's also three months ahead on her Prosper payments; debt consolidation successful so far! (I'd bet my "E" friend has likely improved her credit as well, though I haven't asked.)

Anonymous said...

DCS! Great to have you back after 9 months to give us an update!

That's a great improvement for your friend. Is she going to take out a new loan to take advantage of her now A credit grade?

Anonymous said...

This is a pretty convincing list. Because of the awkwardness of lending to friends and family, I think you make a good case for having some established way for mediating these transactions.

Anonymous said...

Nice info in this post, thanks for your advice. This is a great information for me
Please give me your support to my new blog.

thanks you
best consolidation loan

A Great New Idea in Online Investing