How I Became a Little-Guy Lender

I'm conservative with money, so lending to strangers on a Web site called Prosper might seem out of character. But when I was going over my investments this past winter, my well-balanced portfolio of mutual funds wasn't doing so hot, and my once-high-interest savings account seemed less and less appealing as rates kept falling. Since Prosper's founding two and a half years ago, peer-to-peer lending, as it's known, has been gaining respectability, and I liked the idea of helping people to expand businesses or pay off credit cards with exorbitant rates. I figured I could get at least a smidge more income on Prosper than from my boring, reliable bond fund, let alone a savings account, even if—as seemed likely—a loan I made defaulted.

And so, in January, I transferred a few hundred bucks to Prosper. I created a set of rules for what I'd bid on and how I'd structure my mini-portfolio. But even as I started to acquire loans with double-digit interest rates in Prosper's online auctions, I couldn't help asking myself: Was I nuts for thinking I could pick the "right" loans? What made me believe I understood the real risks of bidding on a stranger's debts?