Dear Dr. Don,
Prosper.com is offering an interest rate over 9 percent. How do they work? How is the return guaranteed? Is their account of less than $100,000 insured by the U.S. government? Please advise.
-- Hisako Homework
You can potentially earn these kinds of yields by loaning money on Prosper.com, but there's no guarantee of repayment. You're not a depositor -- you're acting as the banker. Because it's not a deposit, there's no deposit insurance.
The Bankrate feature, "Person-to-person lending: High return, but risky?" explains the concept in greater detail. The article mentions another Web site, Zopa, that is a social lending network.
Lending on Zopa is a depository relationship where you'll earn yields closer to CD rates and be invested in insured deposits. You get to pick the borrowers but you don't take on the credit risk. Because you don't take on the credit risk, you don't get the higher yield. In fact, you can choose to receive a lower yield to help the borrowers who are using your funds to reduce their interest expense.
This is all a far cry from Nobel Laureate Muhammad Yunus' pioneering work as the founder of Grameen Bank. Yunus developed the use of microcredit lending of unsecured funds to the poor as a way for them to finance businesses that would potentially break the cycle of poverty for that family. His 2006 Nobel speech is uplifting and a great reminder of how innovative thoughts and deeds can help change the world for the better.
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