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May 18, 2007 5:58 pm

I found this website while doing some reading on MSN.  I visited the site because it was described as an eBay for loans.


An individual registers on the site and enters their personal information, including enough demographic information to run a credit check.  Once this is done they can request an unsecured loan for up to $25,000.  The loans are then funded by bids from individual investors.


As with any loan there is some default risk involved.  However the loan repayments are deducted directly from the borrower's checking account and the lender(s) are able to see the credit rating of the borrower.  Additionally, all parties are aware of the interest rate and all loans are for a relatively short 3 year term.


That being said, there have been a number of groups that have popped up offering standard bids for certain loan criteria that they wil fund.  Essentially these groups are attempting to function like a CMO, but these loans are not secured by anything.


My question is...


Do you (or would you) ever recommend such a plan for an accredited investor that is seeking to diversify their portfolio? 


Conceivably this is something that they could do and manage on their own and if properly done they could achieve greater returns that a CD and similar returns to a floating rate fund (if not greater returns)...without the management expenses or paying commissions.


Seriously...one could request a loan for $25,000 at 9% and get it funded.  Then they could use the money to fund other's requests for loans at a rate of 15% or higher.  They could use other people's money to earn a spread of 6%.  Better still, one could use their own money at a cost of 0% and loan it out at a double digit rate.  Call it loan sharking for the masses.


Any thoughts?  Comments?  Rude gestures?

May 18, 2007 6:05 pm

I never knew such a website existed.  I took a look, it's an interesting concept... but it sounds incredibly sketchy.

May 18, 2007 6:16 pm

I don't know about sketchy.  The guy that started this site is also the co-founder of E-Loan, Chris Larsen.


Everything seems to be legitimate and the site looks to be rather smooth.


It seems to me that you cut out the middle man (the banks) and have everything go directly between the borrower and the lender.  Additionally, a lender can spread out their risk by lending no more than $50 to any borrower.  Thus, they can diversify on their own.  Further, no borrower can request more than $25,000 in a single loan request.  This seems to limit the liability too.


Bottom line?  It appears to be pro-competitive for both the borrower and the lender.  And if a lender is prudent at making underwriting decisions then they can pool funds from many investors and manage their own pool of micro-loans.


At least that is how I see it.


I was just hoping to get some other opinions.  I do not believe that any broker at a traditional B/D would be able to advise their clients to do this but this could be a personal hobby of theirs with their own money.  Also, a RIA that also has a lending component to their practice might consider this as a viable diversification option for their clients too.


Again...I was just trying to get a feel for others' opinions.

May 18, 2007 6:56 pm

A couple of my clients hold private mortgages at 12%-14% fully

collateralized by property @ 50, 60 or 70% LTV. If the borrower defaults,

they charge the highest rate allowed by law which is 18%. If needed they pay

an attorney $2500 to foreclose (which is added to the judgement amount)

and the process starts again with a new buyer/borrower.



I wouldn't loan my money unsecured over the internet.

May 18, 2007 7:56 pm

menotellname,


I would never mention this site to a client. The mere mention of it might be misconstrued as your endorsement of it. 

May 19, 2007 12:17 am

doberman,


Thanks for your input.  I do not believe that I would mention it to a client.  I did some research on the default history on some of the loans.  Not bad but not good either.  That combined with the fact that an individual (or group) would have to have a fairly sizable amount of microloans funded to make any reasonable amount of cash makes it somewhat illogical.


On the other hand this does seem like a good way for an enterprising individual to get cash for a small business startup without the hassles of bank financing.

May 19, 2007 9:17 am
menotellname:

On the other hand this does seem like a good way for an enterprising individual to get cash for a small business startup without the hassles of bank financing.



Agreed.