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Some mutual funds want you to pay for the privilege of them (or your investment adviser) taking your money to invest. It's called a load, and it works like a cover charge to get into a nightclub. Luckily, there are such things as no-load funds. As the name implies, shares of these funds are sold without a fee paid to a broker or investment advisor.
The entire amount you invest in no-load funds goes to work for your returns. On the other hand, with load funds, right off the bat you're charged commission (not to mention other fees incurred over the life of the investment). Let's say, for example, you invest $25,000 into a load fund that charges a 5% commission. This costs you $1,250 off the top, bringing your actual investment down to only $23,750.
The often-cited horse race analogy argues against investing in load funds. Here's the logic behind it: Would you place a bet on a horse that had to start a race 200 yards behind the others? Well, maybe you would if you got a tip from a sketchy, trench coat-clad man in a dark alley. However, under most circumstances, it's not smart to put your money on that handicapped horse.
But some argue that at times that man in the trench coat (aka your broker) knows more about the horses than you do, and has a better shot at picking a winner. Also, sometimes these fees are unavoidable because some funds are available only through investment advisers.
Cost-benefit analysis can help determine when a load fund is worth it (in other words, when it will score you a load) and when it is better to "do it yourself" and avoid the fees. Load-fund fees range depending on share class and can cover a variety of costs, such as paper work and fund management.
Home / Markets / Innovation
Tuesday, October 30, 2007
Innovation: Website Makes it Easier for Individuals to Borrow & Lend
Donna Fuscaldo
FOXBusiness
New York --For several months, Shelley Costantini tried unsuccessfully to get banks to lend her money to expand her San Francisco skin
salon.
But it only took the 39-year-old small-business owner under two weeks to get the $20,000 from a group
of individuals who knew very little about her, thanks to a website, Prosper.com.
“It didn’t matter what my credit score
was; the banks always find a reason not to lend,’’ said Costantini, who operates Bella Pelle Skin Studios in San Francisco.
“Now, Prosper.com would be my first place (to go).”
Prosper.com is an Internet marketplace where individual borrowers
hook up with individual lenders. The borrowers list how much money they need and the maximum interest rate they are willing
to pay and then sit back and watch lenders bid for the loan via an auction, similar to how eBay (EBAY) operates.
“The
Internet makes large markets more efficient, and one area of the market that’s not efficient is the consumer-debt market,”
said Larry Cheng, a director at Prosper.com and partner at Fidelity Ventures which provided VC funding for Prosper.com.
Cheng said Fidelity Ventures had been looking for a start-up that breathed new life into the consumer-debt market.
The
Prosper.com loans have a life of three years, with interest rates typically ranging from 7% for people with great credit to
29% for not-so-hot credit. Prosper.com does a credit check on the borrower and makes the lenders put money into a trust account
to ensure the funds are actually available. Borrowers can borrow a minimum of $1,000 and a maximum of $25,000. Lenders have
to give a minimum of $50 but there is no limit on how much they can lend. Prosper.com does encourage lenders to make multiple
small loans to spread out their risk.
Since launching the business 18 months ago, the Prosper.com community
has lent $95 million to individual borrowers, counts 460,000 members and claims a 3% default rate. The default rates,
acknowledged CEO Chris Larsen, should increase as more people use the service.
Prosper.com isn’t only a lending marketplace
however. The company also incorporates social-networking into the experience, allowing borrowers to post why they need the
money and let friends and family vouch for the borrower.
Most of the borrowers are looking to get out of credit-card
debt or need money for their small business, but there are some more unique reasons for the cash. One borrower, for
instance, needs $8,000 to pay for an engagement ring and wedding, while another was looking for $10,000 to pay off her horse’s
veterinarian bills.
The advent of Prosper.com is the normal evolution the Internet was expected to take given the
ability to reach millions of people. First there were business-to-business marketplaces, then eBay and now consumer lending.
Prosper.com is “another way to showcase how entrepreneurs are figuring out the Web gives you scale to create business
you couldn’t before the Web,’’ said Rob Enderle of market research firm Enderle Group. “We’ll see similar things pop up in
areas we haven’t thought of.”
Prosper.com isn’t the only site out there letting people borrow from individuals.
Zopa.com, which currently operates in the U.K. but is coming to America, perhaps before the end of the year, also has a similar
service.
Zopa.com CEO Doug Dalton said the company will launch borrowing websites in Italy and Asia in addition
to the U.S. While it may take time to educate the general public about the service, given concerns about identity fraud, he
is confident it will be successful.
Indeed, Costantini said that at first she was skeptical but now is a big believer
in Prosper.com. So much so, that she’s even thinking of becoming a lender when she has the free cash.
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