A couple months ago, I came across an interesting concept on the Internet, and now that I’ve got a little bit of money to play with, I’m considering looking into it.

The website is prosper.com, and the idea is what they call “people-to-people lending”. The concept is that banks make a lot of money lending to customers, and they’re trying to get those profits into the hands of normal people.

Let’s say I wanted to borrow $5,000 to purchase a motorcycle. I would log onto Prosper and fill out the normal information that a borrow needs to fill out to get a loan. Prosper will then perform a credit check and assign a person a “rating”, from “AA” to “E”. There are also two other categories called “HR” for high risk, and “NC” for those with no credit.

After I’ve created my account, I then put up a listing (here’s an example), where I state that I’d like to borrow a certain amount at a certain interest rate, to be repaid over a certain amount of time. Then, other Prosper users will bid on my listing. No one person will put up the $5,000, but individuals will put up smaller chunks, from $50, up to maybe $200. If I want to be sure that the person takes my money, I might lower the interest rate from 10% to 9.8%.

The rates online are better than cd’s, and although there is some risk in the loans, since they’re spread out over multiple borrowers, it lowers the risk of the investment. A friend of mine at work has been doing this for a few months and has seen a consistant 14% return on his loans.

I’ll let you know it turns out…