Last year I wrote how I had invested a little bit of money into Prosper.com, a peer-to-peer lending website. At the time, I had just invested a bit to feel it out. Like I had said then, it’s a pretty interesting idea because you have the chance to really hunt around for some good opportunities and also spread your loans out a bit to reduce your risk.

At the time I had written this: “I had a lot of fun looking through the list of borrowers and picking out the ones I thought would provide the best risk/reward ratio. I spent a bit of time on this and finally picked out about 9 borrowers, none worse than a C credit rating and most of them AA and A. I ended up with an average interest rate of 10.92%, not too bad for a relatively safe investment.”

I also ultimately decided not to invest more money in Prosper for two reasons: “The first, and primary, is that if even one of my borrowers defaults my entire investment is a wash. Propser has safeguards in place to collect on the defaulted loans, but I have little faith that they would prove effective. Secondly, there is some lag time between bidding on an loan and the actual funding, in addition to some other time my money is simply sitting in my Prosper account rather than an active loan. During that time, my money earns no interest since Prosper doesn’t pay interest on account balances. If they could just throw me 4.0% to hold my money in between loans, I’d feel a little better.”

After a year and some months, I have to say that I probably wouldn’t do it again. One of my loans defaulted after three payments. That default alone pretty much cost me any profit I was going to make on the entire deal. Also, three of my loans paid off within this first year. I was actually relieved about this because I’d rather they pay me back rather than default. The problem, of course, is that then you don’t make as much on your investment. You can reinvest in some new loans, but I found that there was some lag time that your money just sits there before you can get it into a new loan, as besides, I just wanted to get my money back in my hands.

I’d love to hear some success stories out of this site as I’d like to think there’s a way to make it work. I still really like the idea of peer-to-peer financing, I just don’t know if there’s enough incentive for some of these folks to pay back there debt.