Microlending through web sites such as Prosper is growing, though not without some risks. Wired has Top 10 Lessons From a Microlending Pioneer which was a sidebard to an article Got Cash? You Can Money Like a Big-Time Banker
Borrowers have been attracted to Prosper because its auction model offers the possibility of getting lower fixed rates, particularly as part of a group of borrowers, and loans can be funded quickly — sometimes just days after you’ve applied. Also, Prosper makes it easier to get loans for certain kinds of businesses, like eBay storefronts, that are difficult to fund through traditional bank loans.
(T)he number of loans that have gone bad is higher than what was initially predicted. Because of this, Bequette, Boon and Hoenig are holding off investing fresh money.
Bequette, who expected an 18-percent return, is now concerned he won’t beat the 11 percent he had with his mutual funds. His guess is that as a new market, Prosper has attracted people who couldn’t find loans anywhere else, thus driving up the default rate and hurting overall returns.
Hoenig says Prosper’s interest-rate caps of 30 percent aren’t high enough to compensate for the dangers of lending to high-risk borrowers.