I wrote an article awhile back about Prosper.com, explaining how scrutiny is required before Prosper loans can be fairly compared with other investments. That article is still worth reading, and I still think that, after taxes and defaulted loans, a Prosper portfolio is probably not that much better than a savings account and involves significantly more risk.

Recently, though, I found another use for the site.

I wanted to help my brother Steve get some financial know-how, and to encourage him to save money. But real banks are so much hassle for kids to deal with. So I set myself up as a bank for him. He opened an account and deposits money in my cardboard box, if you will. I pay him a generous interest rate (currently at 4.45%) and give him a statement every month showing his deposits and withdrawals and how much interest he’s earned.

So like a real bank, I’m paying him for letting me hold his money; only I’m paying him far more than a real bank would¹. But here’s the deal: like a real bank, I don’t keep all of that money in my cardboard box. I made clear to him that if he ever needs to withdraw more than half his money, he has to wait three business days before he gets the cash. So I take the money he deposits and invest it, and try to earn more on it than I’m paying out.

In order to make more than the 4.45% I’m paying Steve, I’ve lent the money to a couple of people with low-grade credit ratings through Prosper.com, where I aim to get an 8.6% annual return on that money. It’s like I’ve created my own little subprime credit crisis in a teapot, and it’s kind of cool.

I’ve taken on more risk in hopes of earning more, but the upfront cash cost to me is nil since I’m using Steve’s money. The risk to Steve is nil since I’ve agreed to repay him his money plus interest no matter what happens².

¹ The interest paid on savings account for a minor is almost less than negligible; and even grown-ups are lucky to get 4% on a savings account (as of this writing).

² Let’s just say my credit rating within the family is pretty golden.