I've not spent much time looking into this, but it seems like you are basically making an unsecured loan to people. The site does claim to run credit checks on potential borrowers and assigns them a credit rating but, as Savvy Saver pointed out, their credit checks seem to miss a lot of outstanding debts.
Additionally, if you make a loan and it is not repaid, you may not even be able to track down who borrowed your money! From Prosper.com's FAQs:
Will the lenders know my identity?
There is never a need for lender and borrower to contact each other and it is entirely up to the lender and borrower to choose how much information they wish to share about themselves.
So how does Prosper.com make money? They charge both the borrower and the lender. The borrower pays a 1% closing fee (or $25, whichever is greater). If you choose not make payments electronically, the borrower is also charged an additional 0.25% interest. The lender, on the other hand, is charged a 0.5% annual servicing fee, accrued daily, based on outstanding loan principal.
Because the servicing fee is based on a daily outstanding principal balance, which is an amortized amount, the servicing fee will vary for each loan based on its interest rate and length. As an example, the site says on a $5,000 loan at 10% interest, the fee would be $40.40 over its full 3 year length.
Prosper.com was started by the founder of E-LOAN.
I'm somewhat interested in this. I'm not sure about making unsecured loans, but you can start lending with as little as $50, so the risk is low. (The maximum amount you can lend is $25,000.) I prefer hard money lending with property as collateral. The returns are generally higher and you get to keep any loan origination fees. (Prosper.com will collect late fees and pass them on to the lenders.) But this looks like a relatively easy way to get some extra cash.
To share some of my own personal paranoia with you, I will not give any company permission to electronically withdraw money from my bank accounts. (Now electronically depositing is another matter!) If you are interested in using Propser.com, I would suggest opening a separate checking account and deposit only an amount you are willing to lend.