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Prosper brings a lot of great things to investors.  It opens up a whole new arena of fixed income investments, promising credit-card like interest rates to investors (and the associated risks as well).  In addition, it allows you to fund peoples' dreams, or help people reach their goals.  It's satisfying to know that your money is really making a difference in someone's life, and it's fun to watch the progress of loan payments.

Loans on Prosper.com are unsecured debt, meaning they're not backed up by any assets, just by the promise of the borrower that they'll pay you back.  First a technicality in terminology. Although prosper refers to people bidding on loans as "lenders" technically, you are a more accurately a loan repurchaser, as Prosper actually puts up the money and does the actual lending and then sells you the loan. Prosper currently has only 3 year loans. The loans can be up to $25,000, and the interest rates are often capped by state lending limits. The first thing you need to know about Prosper as a lender is the risk. Lending to people is RISKY. Just how risky depends on the borrower and his or her situation. The most important thing to look at is the borrower's credit grade. This Prosper link shows the default rate for various credit grades:

Rating Avg. Default 
  AA     0.20%
  A      0.90%
  B      1.80%
  C      3.30%
  D      6.20%
  E      10.40%
  HR     19.10%
  NC Cannot estimate (no credit history)

Credit Grades used by Prosper are based on the Experian ScoreX PLUS credit scoring system. What you'll notice is that High Risk borrowers have a really high default rate, in other words, almost 20% of high risk borrowers are likely to default on your loan, so be careful when considering who you lend to.  Fortunately, Prosper lets you spread out your risk by letting you bid on small fractions of a large loan- in fact, you can bid as little as $50 on a loan.  All bids are pooled together in funding a loan, and the loan is filled by the set of lowest interest rate bids which fully fund the loan.  Thus, you can spread bids across a variety of loans and build up a portfolio of loans.

So what happens if someone doesn't pay?  There are a couple of stages, starting with a late payment, which progress from being late, 1 month late, 2 months late, 3 months late, to being in default.  When a loan goes in default, a credit collection agency (which you chose before bidding on the loan) will attempt to collect.  In addition to the threat of collection agencies, Prosper.com also reports late payments to major credit rating agencies, so lenders can damage their credit by not paying.  It's a well-thought out system, and I'm quite happy with it. 

Once you decide to become a lender, you'll find it a fascinating and rewarding new world.