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Often times friends and family members loan eachother money, but often with a verbal agreement and little expectation of when payments should be made. This often goes badly and friendships are damaged in the process. To establish some security and structure for replayment of the loan, why not use a service like Prosper to manage a loan between friends and family instead?

Here are a few reasons its a good idea:

  • The loan is reported to credit bureaus, if your friend or family member doesn’t pay, his credit is affected
  • Payments are scheduled monthly and directly deducted from the borrowers bank account
  • You can agree on an interest rate and let calculate the payments for you
  • It gives your friend 3 years to pay the money back
  • Removes the discomfort of discussing terms
  • You can loan your friend part of the money and let other lenders bid on the loan as well

To make such an arrangement, first join Proser as a lender, and have your friend join Prosper as a borrower. Once you have joined, have your friend create a loan request. There are 2 ways to do this, and this is very important: automatic funding or a loan auction. What does this mean?

Automatic funding means that the loan is automatically created once the entire amount is funded at the requested interest rate. So if you loan your friend $5,000 at 8% interest, that’s the final rate and once you place the $5,000 bid the loan review process begins and eventually gets funded.

The loan auction is like Ebay. Your friend puts up the loan request and you bid on it, but others will have a chance to bid the loan rate down. Its not a bad idea, since your friend will have the chance to get the rate lowered, and you might wind up loaning less money!

Lastly, there are situations where you can’t loan your friend or family member the $10,000 he needs. No problem. Have the friend or family member create the loan request and place a bid for what you can loan, for example $5,000, and allow other lenders to help your friend out as well by funding the remaining $5,000. is not only for strangers to lend eachother money, it can be a valuable way to loan friends and family money safely. Also, Prosper will contribute $25 towards the loan if you sign up with a referral from this link. You can learn more about the referral program here.


At January 16, 2008 at 6:15 AM Anonymous said...

thanks for the excellent article, very useful advice since I am caught in a similar situation with a sister that is notorious about repayment


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