I recently joined prosper.com and thought it might interest some of you. This site basically puts lenders and borrows together in an electronic way. I have put in a very small amount of money ($200) to try this out and see will put in more thoughts as time goes on but the idea is very simple. How it works is that people who need money puts up a listing, explaining why they need the money etc etc and then people bid on the interest rate of how they want the returns of their investments to be. It’s an interesting idea and it can potentially more rewarding than conventional saving means since the avg interest rates I see are from 8% to 20% depending on the person’s credit score. The risk here is of course that 1) the person does not pay you back or 2) the site goes down. In my opinion I believe the risk for 2) is minimal so you just have to manage your risk for 1). The suggestions they give to reduce the risk for 1) is to spread your money out and lend it to many many people, reducing the risk that any one loan can have a significant impact on your overall performance. So check it out, www.prosper.com and let me know your thoughts.
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I recommend putting more than a small amount in it. At $200, your portfolio is diversified by 4 loans at most. If one goes bad, it’s going to be devistating. You should aim to have 50 loans so that no loan is more than 2% of your portfolio. Think of it like a mutual fund of small companies that individually can be risky. As a whole though, diversification saves you and can make it a very good return.