• Wired , Thursday, May 10, 2007 10:15 AM

What do you get when you combine social networking, online auctions and would-be investors? Prosper, the latest Internet startup to bring Web 2.0 to "a very old-guard business," as John Witchel, the company's chief technology officer, puts it. Prosper pools together groups of investors who lend money to thousands of U.S. residents for anything from consolidating their credit-card debt to starting a small business. It caters to a potentially huge (although long-tailish) market previously off-limits to investors: consumer debt.

This isn't microfinance, by the way, which is often aimed at developing nations. Rather, Prosper's aim is to make money for borrowers and investors alike. For starters, the company requires would-be borrowers first to verify their identity and then provide access to a credit score compiled by the financial data firm Experian. Prosper then assigns the borrower a credit rating and helps match a number of lenders to the loan request. Even small loans, like a $5,000 loan, could be funded by as many as 50 lenders. Lenders set their own interest rates based on their assessment of the given financial data, weighing risk and return. Borrowers then piece together their loan, choosing from the lowest rate offers.

Prosper is far from the only online group lending service, but what sets it apart is its auction model, which guarantees that borrowers--particularly groups of them--get the lowest possible fixed rates. Loans can also be funded more quickly than going through a bank, sometimes just a few days after borrowers apply. Lenders, of course, can easily block borrowers who previously defaulted on their loans.

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