Personal loans online

Colin Nash, 35, was struggling with $12,000 in credit card debt late last year. Meanwhile, Michael Fisher, 24, was looking for a new investment. So, Fisher loaned Nash $200.

The two men, however, had never met.

Nash and Fisher are members of Prosper. com, the U.S. leader in a growing trend known as peer-to-peer lending, which facilitates loans between complete strangers.

Social lending has been around since the days when needy families turned to the richest man in town, but the Web is breathing new life into the practice. Loans on Prosper and Facebook's LendingClub have risen to $100 million this year from $27 million in 2006, according to Online Banking Report. By 2010, the report forecasts $1 billion in peer-to-peer loan originations.

"I'm sure banks are watching it," said Jim Bruene, the report's author.

Zopa.com, a social-lending site founded in Britain in March 2005, launched in the United States last week.

The idea behind the sites is that borrowers can find better rates than traditional banks offer, while lenders can earn higher returns than from a savings account or other investment.

Borrowers on Prosper post how much money they need - up to $25,000 - the purpose of the loan, and what interest rate they can afford. Lenders bid on the loans of their choice, typically funding only partial amounts and diversifying their risk among dozens or hundreds of loans.

Most loan requests are for debt consolidation, followed by small-business and entrepreneurial purposes. The average loan totals just under $7,000. Prosper claims it has facilitated $98 million in loans since launching in February 2006.

Prosper's added appeal, however, goes beyond the bottom line. Photos and personal narratives accompany borrowers' requests: A father who needs $25,000 to equip a house and car for his son, who has recently begun using a wheelchair. A young couple seeking $5,000 for their wedding, who plead, "Please help us get married!" A group of young men in Montana who want $1,000 to purchase a professional wrestling ring.

The opportunities for social connection appeal to users, said Prosper cofounder and chief executive officer Chris Larsen. Borrowers can appeal to lenders to look past a couple of late payments or spotty credit history, while lenders enjoy the satisfaction of seeing their money help someone in need.

"When you're dealing with people, it's 'I want to do well, but I also want to feel good about how I'm doing well,' " said Larsen, who formerly was CEO and cofounder of financial-services company E-Loan Inc.

But the numbers matter. Each Prosper borrower is assigned a grade based on his or her credit score to help lenders evaluate the risk, and the site verifies borrowers' identities. The average rate of return for lenders is 9.28 percent, with lower-grade loans earning 10.45 percent, according to Prosper.

Prosper makes money by charging a 1 percent or 2 percent closing fee, based on the borrower's credit grade, and lenders pay an annual loan-servicing fee of 0.5 percent to 1 percent. It also collects late-payment fees for lenders and reports to credit bureaus. After 30 days, delinquent loans are assigned to a collections agency.

Prosper's default rate hovers at about 2.7 percent, Larsen said, but that figure is expected to rise as more loans mature. According to a July 2007 Deutsche Bank AG report, about 5 percent of all Prosper loans originated more than 6 months ago have defaulted, while payments are late on nearly 10 percent of all loans.

Prosper user Mike Kost, who has loaned out about $5,000 on the site so far, said he had observed an uptick in the number of borrowers missing payments, one reason he limits his loan bids to the minimum $50.

"The risk is not a problem," said Kost, who writes a blog about Prosper. "It's when you don't get paid to take that risk that it's a problem."

Larsen has used Prosper to lend his housekeeper $25,000 to pay off high-interest-rate loans and credit cards.

Loans made it possible for Prosper borrower Colin Nash's wife to leave her coffee-shop job to care for their children, including a second boy born in mid-November. He managed to shave several points off the rates on his credit cards, one of which had reached 24 percent, he said.

"You can't walk into a bank and say: 'Come on, man, I'm one guy, and I don't want my wife to have to work,' " Nash said.

Software design engineer Michael Fisher said his decision to lend money to Nash was based on both numbers and shared experience. Fisher leads a group on Prosper of about 70 employees of Microsoft Corp., including Nash.

Since joining Prosper about a year ago, Fisher has loaned out about $15,000.

"It's just more fun to invest in Prosper, than to, say, invest in stocks," Fisher said. "You're closer to real people."