While banking industry staggers, Prosper.com offers another way

While the idea of person-to-person lending might seem like a novel one in countries with sophisticated banking systems, it's actually the oldest form of credit extension.

Long before there were banks, there were individuals with cash savings who would lend it to those who needed it, in exchange for the promise of repayment with interest.

A lot of the media attention on the practice, also called micro-lending, has been focused on developing countries.

But Prosper.com, a San Francisco-based startup with a high-powered group of investors, is focusing on a market closer to its home.

The company is using an auction style marketplace to connect individual lenders and borrowers over the Internet for loans ranging from $50 to $25,000. In November, Prosper announced that it had originated an aggregate loan amount of more than $100 million and had nearly half a million members.

Using the site, borrowers create profiles of themselves and their loan needs and are assigned a credit rating by  Prosper. Individuals can lend money by themselves or as part of a lending group.

In this Vator.tv video pitch, co-founder and CEO Chris Larsen calls Prosper "an eBay for money."

Prosper has already raised $40 million from top-tier VC firms like Benchmark Capital and Accel Partners -- and boasts Jim Breyer, Bob Kagle and eBay founder Pierre Omidyar among its board members.

One of the concerns about person-to-person lending has been the possibility of high default rates, since there is an assumption that individuals can't do as thorough a job as a commercial lender.

That's a legitimate worry -- and indeed, some lending groups on Prosper admit in their profiles that they've been hurt by defaults.

Yet given the meltdown that the U.S. financial services industry has started by extending mortgage loans to unqualified borrowers, can Prosper, its auction marketplace and its members combine to do any worse in vetting loan candidates?

After all, a wide range of banks, mutual funds, pension funds and others bought billions of dollars worth of sub-prime loans when they were packaged, sold and re-sold BY PROFESSIONALS. Global financial services firms have now written off close to $100 billion of the value of these assets, with more pain still to come. 

And Prosper's privacy policy -- which prohibits it from selling any information on its borrowers to outside parties -- is a huge selling point for borrowers in a world when consumers are inundated with unsolicited offers -- often for high-interest credit.

Prosper isn't for everybody. A look at many of the loans indicates that borrowers are often paying interest rates in the high teens. But the fact that people are  taking those loans to consolidate their bills gives you some idea of just how much high-interest credit card debt U.S. consumers are carrying -- and how big person-to-person lending can become.