By Chet Hardin

Mgc0216, or Mike, has a couple credit cards he wants to consolidate at a lower interest rate. Plus, he just started an RV-rental company this summer, and he needs a little extra money to keep him solvent through the down season. So he goes online to Prosper.com. There he secures a $25,000 loan at 14-percent interest.

“That’s a pretty aggressive rate for that amount of money,” he says. He has a pretty good credit rating and job history, and private lenders are comfortable with that rate.

Then, there is Monica, who first went on Prosper.com back when it started in February 2006. She wanted to borrow $20,000 at 8.75-percent interest.

“Hey everyone!” she wrote in her loan request. “I am a college educated, responsible woman who lives in Chicago. I have an awesome job as a tax consultant and I am looking to borrow money to build up my credit and reinvest it to coup my costs. I will not spend it! This is a very low risk deal, you get guaranteed interest on your money, I invest it to coup those costs, and you help me build my credit!”

She attached a photo of herself: Young, lit in blue, with long brown hair, she looks like someone you would want to grab sushi and a movie with, but not someone you would want to loan large sums of money to. But now, four loan requests later, she has learned what it takes to attract lenders, and it looks as though she will be getting her money—at a whopping 29-percent interest.

They are just two of the thousands of registered users at Prosper.com, which bills itself as “America’s first people-to-people lending marketplace.” The site is established on a very simple premise: Why go to a bank when you can go to complete strangers? Through Prosper, people with money are able to connect with people who need money. Anyone can sign up, and the process is relatively simple.

Once a prospective borrower is approved (identification is verified), they can make a loan request for any amount from $1,000 to $25,000, setting the maximum interest they are willing to pay. They are assigned a credit rating—AA, A, B, C, D, F, and HR (high risk)—and are given a full Web page to make their pitch.

All loans are made on a three-year payment plan, but a borrower can pay off an entire loan immediately after receiving the money, without penalty, if they want.

For the prospective lender, the process is just as simple. They register, transfer funds from their bank to Prosper, and that is it. For as little as $50—the minimum amount one can loan out—they are ready to become a cyber loan shark.

The potential of growth within Prosper attracted Zach Maxfield, analyst at Second Curve Capital in New York City, who signed up and started loaning money out in July. “I thought it was a very interesting idea that I wanted to try out. I don’t want to say that it would have huge ramifications for the industry if it works out,” he says. “It obviously is never going to be as big as the credit-card industry. But I did want to see what it was like, and test it and see whether or not the credits would perform.”

Maxfield suspected if the program were going to fail, it would fail right away.

“If it was going to be bad, it would be lots of first-payment defaults, effectively just fraud. But I haven’t seen that,” he says. “I have had a couple of delinquencies, but none that actually went to default. I was actually a little surprised, because I intentionally picked a lot of loans that were very far out on the credit spectrum. But, thus far, everything has been going great.”

Maxfield, who has made 25 $50 loans, is averaging a return rate around 20 percent. Although that is a high return on his money, he points out, if five of those loans go into default, that profit will drop dramatically. He has been blogging about his experience at Bankstocks.com.

If the numbers tell the story, the story of Prosper so far has been a success. Since opening in February, the site has registered 80,000 users. There has been $17.4 million loaned out through Prosper in 3,600 loans. Of that amount, only $11,000 has gone into default.

But fans of this site say that this is about more than just the money. It is about social networking. You can choose who you want to invest in based on who they are. There is a social connection; you are helping out someone in need. You can choose who to invest your money in based on their situation, their story, their picture.

This is what attracted Tea-Fanatic. The San Fransisco-based entrepreneur is seeking a $25,000 loan to continue construction work on her retail tea shop. Her request features a photo of herself leaning into a large barrel of green tea in a marketplace in China.

The amount of money she is borrowing from Prosper, when compared to all the money she already has invested in her shop, is not huge, she says. “But the idea is intriguing. It is a community of people. The community supports your project.”

chardin@metroland.net