Maggie Delbon/The Press-Enterprise. Micro Loans Go Global. Riverside residents recommend social lending Web sites

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1 Maggie Delbon/The Press-Enterprise Micro Loans Go Global Riverside residents recommend social lending Web sites 05:06 PM PDT on Saturday, April 12, 2008

2 By LOU HIRSH The Press-Enterprise Returning from a trip to Africa in early 2007, Bruce Hammond, of Riverside, wanted to help out people in some of the poor villages he had just visited. He did some Web research, and heard from friends about a nonprofit social lending site called Kiva.org, which had been mentioned on book tours and TV shows by former President Clinton, Oprah Winfrey and other celebrities. Hammond checked out the dozens of business owner profiles from around the world listed on the site and, like many Kiva visitors, made loans of $25 each to four businesses -- two general stores and two used-clothing stores in Ghana and Kenya. Those loans were paid back to him through Kiva within about six months. That experience led Hammond to make four more loans earlier this year, totaling another $100, to four small businesses in Tanzania. "These countries don't have a lot of industries that create jobs, so a lot of times the only way for people to make money is to open their own businesses," said Hammond, 50, a U.S. postal carrier. "This seemed to be a really good way to help people who need the money, and the way the system is set up, it does get paid back." What ebay did for selling things online -- bringing together merchants and buyers -- a new breed of social "microfinancing" Web sites could do for money lending. Some like Kiva are being used for purely philanthropic purposes, but experts say other for-profit sites are becoming increasingly popular meeting places for qualified borrowers and lenders. Sites with names such as Prosper.com and Zopa.com, as well as British financier Richard Branson's Virgin Money, are garnering traffic from borrowers looking to consolidate credit-card debt, start or expand a small business, or meet other financial needs currently not covered by traditional banks. Lenders who join the sites see them as a route to relatively safe returns on small investments of their otherwise unused cash. "I wouldn't be surprised that if you see the traditional loan sources start to dry up in this economy, more people will go to these person-to-person sites," said James Van Dyke, founder and president of Javelin Strategy & Research in Pleasanton, which does consulting for the financial services and payments industries. Van Dyke said advances in Web technology, ensuring secure transactions and allowing credit histories of borrowers and lenders to be verified, are shifting the focus of financial decision-making from institutions to individuals. While the sites are not yet grabbing huge chunks of business from traditional banks, Javelin projects that the demand for social lending services to pay off credit card debt could grow from $38 billion in 2007 to $159 billion by 2012.

3 Small Loans, Low Interest Van Dyke said the social sites take on lending amounts that large banks normally wouldn't deal with because they're too small, and thanks to competition among prospective lenders on the sites, loans can be obtained at interest rates 3 or 4 percent below those that a bank would charge to the same borrowers with similar credit histories. Generally, the sites are free to join and make their money through transaction fees, usually 1 to 3 percent, collected from borrowers when loans are initiated. Chris Larsen, CEO and co-founder of Prosper.com, said about two-thirds of the site's business is people taking out debt-consolidation loans, mostly due to credit card debt, with the remaining third seeking funds for a small business. Larsen said potential borrowers who've seen their housing values drop can't tap their home equity any further, and credit card companies are not giving major breaks on rates. "We've seen a huge, dramatic increase (in business) over the last year," said Larsen, noting the site has more than 600,000 members and has dispensed $130 million in loans since its 2006 debut. He said a Prosper borrower with good credit can get a three-year, fixed-rate debt consolidation loan for as low as 7 percent, and there are no prepayment penalties. Show What Lenders Support Credit-worthy borrowers post profiles on Prosper showing what they want loans for, and private-party lenders compete for the loans based on interest rates. "The small business owner can link to his own Web site to show what he does," said Larsen. "The lender needs to know what he's going to be supporting." Patric Westmarc, a Riverside tax preparer, sought a loan on Prosper last fall for the $8,000 cost of an elective plastic surgery that his medical insurer would not cover. Within eight days after posting his profile, he got responses from a total of 87 people willing to lend portions of the tab to him at 10.5 percent interest, enough to cover the full cost of his surgery. Westmarc makes his monthly payments to Prosper, which distributes proceeds to the lenders. He said he has been recommending the site to friends and clients. "I'm thinking of doing some lending through this also," he said. Credit Unions Involved At Zopa USA, borrowers are matched up with credit unions in their area willing to lend at rates as low as 8.49 percent as of April 7, depending on credit history. The borrower

4 can then tap into his own social network through the site -- similar to social hubs like Facebook.com -- for help in repaying the loan. Those in the social network can help the borrower by investing in certificates of deposit from the lending credit union. The CD purchaser can choose to have a portion of the guaranteed return rate percent as of Monday -- go toward paying off the borrower's loan, thus reducing the borrower's monthly payments. According to Scott Pitts, managing director of Zopa's U.S. operations, the site's borrowers have included a rocket scientist who used his loan to purchase a used Atlas rocket for a research project. Another person's Zopa social hub is based on a common love of cats, with members sharing their wacky feline home videos a la YouTube. "We have one couple who took out a loan through Zopa to pay for their wedding," Pitts said. "It's a big undertaking so they're using this as a way to finance the start of their life together." Philanthropic Focus For others, philanthropy remains the sole focus of social lending. At Kiva, public relations director Fiona Ramsey said the site now has 272,000 members, adding nearly 150,000 in the last six months, and has disbursed $26.5 million in loans to entrepreneurs in developing nations. "It's people on blogs telling other people about us," Ramsey said of the site's growing acceptance. "It really has taken on a life of its own -- we don't need to spend any money on marketing." Reach Lou Hirsh at or lhirsh@pe.com Social Lending Some popular "microlending" Web sites bring lenders together with others looking to borrow funds to start businesses, consolidate debt or meet other expenses not covered by traditional bank loans. Kiva (Kiva.org) Started: 2005 Members: 272,000

5 Loans dispensed: $26.5 million How it works: Lenders make zero-interest loans of as little as $25 to business owners in developing nations who post profiles with the help of regional aid agencies. Loans are repaid in six to 12 months. Prosper (Prosper.com) Started: 2006 Members: 640,000 Loans dispensed: $130 million How it works: Borrowers post profiles including amounts and purpose of loans. Privateparty lenders bid on three-year loans based on fixed interest rates. Zopa USA (Zopa.com) Started: 2005 Members: 300,000 Loans dispensed: Not disclosed How it works: Borrowers are matched with local credit unions making five-year loans. Borrowers can tap into social networks to help them repay loans through purchase of credit union CDs. Source: Company Web sites