Most loans are unsecured. "Secured" loans involve collateral like cars, real estate, etc. If the loan recipient defaults, the collateral is seized and sold. Credit cards, personal loans, business loans, etc. are typical examples of "unsecured" loans.
The way propser worked is someone who needed a loan could post it, then a bunch of people could "bid" on the loan at a particular rate of return. For example, if John Doe needed $3,000 for a home repair or whatever and his credit was good, he'd post something saying this and the P2P service would report on the person's creditworthiness. Their request for the money was then available for everyone to see.
You or I could then go online and see all these people asking for loan funding and decide, "gee, this guy sounds like a good risk and a decent fellow - I'll 'bid' $100 towards his loan at an X% rate". Then someone else might do the same for his loan. Someone else might offer $500. A few more people might offer $50 each. You get the idea. When the loan had enough people offering to fund portions of it totalling up to the requested amount, the loan was written (by Prosper or whomever they were using as an underwriter) and the loan recipient would pay it back - the individual people "funding" the loan would then be paid back their prorated shares plus interest.
I invested about $5,000 in this way, spread out over a bunch of different people - $200 here, $500 there, etc. Most were intermediate risk and I only had one default. But (like banks are supposed to do) my "hedged" risk more than offset the loss on the one defaulted loan (I think it was $200). Obviously people can (and sometimes do) default, but these are real loans and the penalties are real for default - their credit suffers and the loans can eventually be sent to collections (although as a "funder" you don't get anything back on this I don't think - at least I never did).
By spreading the risk around, you minimize your exposure and can make a decent profit. I think I made something like 13% on average return on my $5k, less the $200 I lost, not bad for a year or so's work - enough to buy some 911 parts (I think I netted 500-something when all was said and done).
Anyway supposedly there are a ton of these kinds of P2P lending setups - many are used in emerging markets to fund startup businesses in poor countries, etc. I'm wondering if anyone knows of one other than Prosper (since they're in government license limbo right now or whatever) that I can use? Maybe we should set one up?
