Internet spawns alternative loans for homeowners

Homeowners who are having trouble borrowing against their house are starting to look to an interesting new source for cash: strangers.

Online networks have emerged in recent years that allow people to find loans or make them, the same way they might exchange music or bid on collectibles on eBay. The sites that are leading the trend - Prosper.com and Zopa.com - say they have noticed a spike in activity since traditional lenders began restricting second mortgages and home equity lines of credit.

"We've seen a major shift in creditworthy people getting funded on our site," said Chris Larsen, the chief executive at Prosper. "A lot of that shift is from people who'd traditionally gotten home equity loans."

Prosper's users register with the site, permit the company to pull their credit data, and then post a loan request along with an upper limit for the amount of interest they are willing to pay. Loans, which are typically financed by several people seeking to spread their risk, amortize over three years at a fixed rate, with no prepayment penalty.

Lenders review requests individually or let Prosper offer loans to borrowers who meet the lenders' specified criteria, like credit scores or group affiliation.

Borrowers pay Prosper a fee of 1 percent to 3 percent of the loan, then receive a check within four days. They make monthly payments to Prosper, based in San Francisco.

The average interest rate in May for a $20,000 loan given to borrowers with excellent credit was about 14 percent, and 9.5 percent for an $8,000 loan. These rates are generally higher than what borrowers would pay with a true home equity loan, but lower than credit card interest rates.

Roughly 50 percent of the prospective borrowers with excellent credit get financing, with the percentage declining for borrowers with credit scores below 720.

Larsen, who is the founder and former chief executive of E-Loan, an online lender, said banks have begun asking how to pass along to Prosper customers who no longer qualify for traditional second mortgages. He added that demand for loans in New York City has been strong, partly because some lenders are reluctant to make home equity loans on co-ops, which often have more complicated approval processes.

Zopa, which, like Prosper, helps to arrange loans of up to $25,000, has had a similar surge in lending activity, according to Doug Dolton, the chief executive.

The site charges no fees and follows a different approach. Zopa helps lenders evaluate a borrower's finances with a credit check, but it takes the additional step of requiring proof of income, and it offers loan approvals immediately on its Web site.

Zopa's lending mechanisms differ in other ways. Its lenders are people who take out certificates of deposit, and may agree to forgo part of the interest to help finance loan requests from friends or others whose appeals are particularly touching.

For instance, a Zopa user who takes out a $10,000 certificate of deposit can earn 3.75 percent interest from the site, which relies on credit unions to finance the loans. If the same user is so sympathetic to a specific borrower that he is willing to accept 3 percent, which is roughly the national average for a one-year CD, he can help the borrower cut a loan's rate by the amount of interest that he has sacrificed.

Depending on their financial qualifications, borrowers' starting interest rates run from 8.49 percent to 16.99 percent, and depending on their help from others on the site, their payments drop from there. "We actually have one borrower who has no monthly payment," Dolton said.