New York--For several months, Shelley Costantini tried unsuccessfully to get banks to lend her money to expand her San Francisco skin salon.
 
But it only took the 39-year-old small-business owner under two weeks to get the $20,000 from a group of individuals who knew very little about her, thanks to a website, Prosper.com.

“It didn’t matter what my credit score was; the banks always find a reason not to lend,’’ said Costantini, who operates Bella Pelle Skin Studios in San Francisco. “Now, Prosper.com would be my first place (to go).”

Prosper.com is an Internet marketplace where individual borrowers hook up with individual lenders. The borrowers list how much money they need and the maximum interest rate they are willing to pay and then sit back and watch lenders bid for the loan via an auction, similar to how eBay (EBAY) operates.

“The Internet makes large markets more efficient, and one area of the market that’s not efficient is the consumer-debt market,” said Larry Cheng, a director at Prosper.com and partner at Fidelity Ventures which provided VC funding for Prosper.com.  Cheng said Fidelity Ventures had been looking for a start-up that breathed new life into the consumer-debt market.

The Prosper.com loans have a life of three years, with interest rates typically ranging from 7% for people with great credit to 29% for not-so-hot credit. Prosper.com does a credit check on the borrower and makes the lenders put money into a trust account to ensure the funds are actually available. Borrowers can borrow a minimum of $1,000 and a maximum of $25,000. Lenders have to give a minimum of $50 but there is no limit on how much they can lend. Prosper.com does encourage lenders to make multiple small loans to spread out their risk. 

Since launching the business 18 months ago, the Prosper.com community has lent $95 million to individual borrowers, counts 460,000 members and claims a 3% default rate.  The default rates, acknowledged CEO Chris Larsen, should increase as more people use the service.

Prosper.com isn’t only a lending marketplace however. The company also incorporates social-networking into the experience, allowing borrowers to post why they need the money and let friends and family vouch for the borrower.

Most of the borrowers are looking to get out of credit-card debt or need money for their small business, but there are some more unique reasons for the cash.  One borrower, for instance, needs $8,000 to pay for an engagement ring and wedding, while another was looking for $10,000 to pay off her horse’s veterinarian bills.

The advent of Prosper.com is the normal evolution the Internet was expected to take given the ability to reach millions of people. First there were business-to-business marketplaces, then eBay and now consumer lending. 

Prosper.com is “another way to showcase how entrepreneurs are figuring out the Web gives you scale to create business you couldn’t before the Web,’’ said Rob Enderle of market research firm Enderle Group. “We’ll see similar things pop up in areas we haven’t thought of.”
 
Prosper.com isn’t the only site out there letting people borrow from individuals. Zopa.com, which currently operates in the U.K. but is coming to America, perhaps before the end of the year, also has a similar service.

 Zopa.com CEO Doug Dalton said the company will launch borrowing websites in Italy and Asia in addition to the U.S. While it may take time to educate the general public about the service, given concerns about identity fraud, he is confident it will be successful.

Indeed, Costantini said that at first she was skeptical but now is a big believer in Prosper.com. So much so, that she’s even thinking of becoming a lender when she has the free cash.