If you need to raise some money and would like to get more than the 0.70% interest from your savings account, peer to peer lending sites are one option that you can use these days. It’s easy to sign up at Prosper.com and start borrowing or investing money right away with a Fixed Rates as low as 6.59% APR. In the old days, we had to depend on friends and family, or talk to the bank. In those days, it was more difficult to get a short term loan.
When I was a kid in Thailand, I remember my dad participated in a peer to peer lending game to raise money for his business. I think this was a way for small business merchants to raise money for expansion or stock inventory. I recently asked him how this works and here are the rules.
– The Host.
– Participants. Let’s say there are 9 participants to make the math easy. We’ll name them after the phonetic alphabet – Alpha, Bravo, Charlie, Delta, Echo, Foxtrot, Golf, Hotel, and India.
Time: Once a week
The first week, everyone brings $1,000 to the pot to contribute to a $10,000 pot. The host takes this pot so essentially, the host gets $9,000 up front with minimal investment.
Here is where the action picks up. Again, everyone brings $1,000 to make a $10,000 pot. Then everyone except the host places a bid on the pot. Whoever makes the highest bid will take the pot home. Once someone wins the pot, they do not bid during future weeks, though they still contribute to the pot. Let’s make it clear and list out a sample bid.
Alpha – $1,100
Beta – $1,040
Charlie through India didn’t need the money this month so they all bid close to the baseline of $1,000.
Alpha needs the money to restock his pet store so he makes a high bid to win the pot. He’ll take home the $10,000 this week.
Everyone except Alpha again brings $1,000 to the pot. Alpha will have to contribute his last week’s winning bid amount, which was $1,100. So this week, the pot is $10,100. The Host and Alpha have already taken the pot home once, so they cannot be part of the bidding. Beta through India will make a bid and the highest bidder will take the pot home. Let’s say Foxtrot needs the money this week and bids $1,120. He’ll take the $10,100 pot home.
Contributions to the pot: Alpha ($1,100), Foxtrot ($1,120), Host and everyone else ($1000)
The pot is $10,220 this week and the bidding ensues.
I’m sure you get the idea by now. If you want to invest, then you would bid low and stay in the game until the end. The last one to take the pot home will be the one that makes the most money from the “interest.”
There are some risks as well. The Host picks the participants and he should invite only honorable people into this game. If anyone bails out, then the Host is responsible for that person’s portion of the debt. Let’s stay Foxtrot won the pot in week 3, lost it gambling, and then left town. The Host will have to bring an additional $1,120 to the pot every week until the game is done. The advantage of being the Host is that he gets $9,000 up front to invest. He doesn’t make any money from interest, but he doesn’t pay any interest either.
Well, what do you think about this peer to peer lending game? It’s much easier these days on the internet, but doesn’t this sound like fun? heh heh. 😀
Any questions? Send them to me and I’ll get an answer from my dad. There are variations to the game of course. Some games set each week’s baseline bid to the last winning bid. This will ensure higher payoff for the last players in the game.