Late last week, I withdrew $50 from Prosper. This $50 was my initial deposit I had placed in it a month ago, which I then withdrew a week later, only to deposit it again. This was during a month of research into Prosper.com, an online lending site, as a possible investment vehicle.

There are quite a few reviews (most of which can be found via Technorati) from people who have used Prosper but will never touch it again, to those that have hundreds of thousands of dollars invested in it.

The concept is quite appealing: Make high interest on your principal, ranging from 7-25%, by lending people money using Prosper as a middleman. The benefit is that you are able to make a decent amount of interest with what can be considered to be less risk than your average investment that can return 7-25%. You can also choose your level of risk by the type of person you lend to. So take a risk on a person without referrals and a low income but with a 22% interest loan, or play it safe on a person with a high reputation and income for 8% interest.

Even investing in the lowest risk lenders could still give you a 7-8% return, better than any online savings bank. Of course the full sum of that money is completely illiquid for the three year period of the loan - assuming it gets paid back in that term as well.

The risks of these loans are fairly self evident. However, it was the risk of the site itself that made me decide not to pursue this any further. I asked myself a simple question: If I went to Prosper.com tomorrow and got a 404 Page Not Found error, what would I do? Say I investigated the matter and the company itself had gone bankrupt. I had an official loan with these lenders I gave money to, but how would I pursue them for this money? If they owed hundreds of people money (which is often the case at Prosper), how could they feasibly schedule that many payments per month? They could go through an agency, but how much would that agency take off of my interest?

With a bank, I know the money is FDIC insured by the government. With an online brokerage, I know that I have official shares of stocks with these companies, that would be easy to obtain records of. I just would hate the thought of losing money not by losing the money itself, but by losing the access to it.

I still really like the concept of Prosper.com. And I suppose if I had more savings to “play” with, I might consider taking some of that to Prosper. But as I am still in the savings building phase of my life, I just can’t consider investing in such an ethereal entity as an online loan website.