Prosper is the eBay of peer-to-peer lending. Borrowers create listings for their loans, describing why they need the money and the maximum interest they're willing to pay. Loans range from $1,000 to $25,000 for a three-year term.
As a lender, you can put up as little as $50 and bid on loans individually or set parameters for a portfolio and invest automatically. The site charges 1% of the loan for good-credit borrowers and 1% of the annual loan balance for lenders.
The loans are unsecured, so there is risk. Double-A-rated borrowers typically pay lenders rates of about 8% and default less than 1% of the time. The lowest-rated borrowers often pay about 30% interest and have a default rate of more than 18%.
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Prosper now helps lenders make informed decisions by making repayment histories of borrowers available. At the point of bidding, the site shows how well similar loans have performed.
The borrower's endorsements are another safeguard. Getting friends to vouch for borrowers creates a real sense of peer pressure for them to repay their loans, says Chris Larsen, Prosper's chief executive officer. A borrower with one endorsement is 35% more likely to pay up.
It's not wise to be the sole bidder on any loan. Try lending in increments of $50 to $100 on loans with medium to low risk. You should earn an attractive rate of return and be somewhat protected.
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