I recently joined the Prosper.com community as a lender. I had been looking for an alternative investment for a while and Prosper seemed like an interesting option that would allow me to diversify my portfolio.

Prosper has been around since February, 2006 but a friend just recently told me about the service. If you aren’t familiar, Prosper.com is a peer-to-peer lending website that allows you to bid on loans that other people are requesting. Prosper works much like eBay, but instead of listing and bidding on items, people list and bid on loans using Prosper’s online auction platform. Here is a description from the Prosper website:

Prosper enables borrowers to request loans up to $25,000 by posting listings indicating the amount they want to borrow and the maximum interest rate they wish to pay. Lenders search for and select these listings based on the borrower’s credit history, debt profile, and other factors. Lenders bid on listings by indicating a minimum rate they are willing to accept. When a loan is matched between borrower and lender, Prosper handles all of the tasks needed for payment and collection of the loan.

I really enjoy the interactive aspect of Prosper.com. As a lender you need to do a certain amount of research to ensure you are investing your money wisely. Also, the bidding process requires some interaction since you can easily be outbid just like with any auction. It’s almost addictive once you start bidding on loans. Thankfully, Prosper does provide a mechanism to put in a “standing order” which will automatically bid on loans for you based on criteria that you establish.

There is quite the sophisticated community that has built up around this service. There are people who engage in arbitrage by borrowing money on Prosper in hopes that they can loan it out at a higher rate. Prosper also has an API that allows developers to build applications using the Prosper loan data.

One of the criticisms against Prosper is that they do not pay interest on idle funds - the money that is sitting in your account waiting to be loaned out. Also, your money may sit idle up to 1 to 2 weeks waiting for the auctions to complete and loans to be funded. Another criticism is that transferring money to Prosper can take 4 business days before transferred funds can be used for bidding.

Criticisms and risks aside, I think it looks like a good investment. Will I be prosperous? Only time will tell.