Sunday, January 21, 2007

The Plumber's Pipes Always Leak

Okay, I could not resist. My fourth of the four promised posts to Cousin is about to have economic content.

I could not resist, however.

Plus, it contains investment advice (which, by the way is ironic, coming from me. I'm all about the ease of Index Funds).

I heard about this Website on MPR: Prosper: the online marketplace for peope-to-people lending.

It is essentially the eBay of borrowing and lending, promising to privatize debt by allowing individuals to lend and borrow money from other individuals. You could, for example, bid on someone's loan request (in increments as low as $50) at a rate as high as 22%.

Lending money directly to people is a great way to earn a fair return. And when you make lots of small loans rather than one or two big ones, you spread your risk out and ensure a more reliable return. It's called diversification and the pros do it every day. Here's how it works.

C'mon, where are you gonna find a return like that??

I know, you're asking what happens if someone defaults? Individuals (like yourself) don't have all the intelligence that banks have in determining credit risks. But this is also where it gets interesting. Like eBay, people get reputations. Sure, you could go to Prosper, borrow 10 Grand, and stiff the lenders. But you're never coming back again. Plus, they suggest that you loan smaller amounts of money to many people. So if one person defaults on you, you only lose $50. Not $5,000. As the argument goes, you take similar risks in the stock market.

This falls into the ever-growing category of: Why didn't I think of that?

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