Microloans are a new way to borrow

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Microloans are a new way to borrow $1,000 to $25,000 at an interest rate you can afford.

You can use the money to pay bills or make important changes in your life, such as going to college or buying a power mower and gardening equipment to start a lawn-care service.

The better your credit, the lower your interest rate and the greater your chance of getting the money you need. But applicants with no credit, or bad credit, can and do get funded.

If you're running to the payday loan store every few weeks -- or rolling payday loans over week after week -- landing a microloan could allow you to break that cycle of debt.

The idea is simple: A broker matches borrowers with individual investors who have money to loan. It costs nothing to apply. You're only charged a small fee if you're successful.

So far, the best broker we know of is Prosper.com. Here's a step-by-step look at how it all works:

Step 1. Register.

Start by filling out a form that allows Prosper.com to check your credit, confirm your identity and look for signs of fraud. This is free and Prosper.com promises not to sell or share any information you provide with anyone else.

Based on your credit information and other pertinent details, you will be assigned a credit rating of AA (the best) down to E (not so good), or HR, which is "high risk" or NC, which stands for "no credit" history.

Step 2. Complete a loan application.

Once you're registered, you can apply for a loan, telling prospective lenders how much you want, why you want it and the maximum amount of interest you're willing to pay.

Prosper has a chart showing average interest rates for each credit rating. They start at 7.85% for AA-rated borrowers who want $5,000 or less, and go up to about 25% for an NC-rated borrower. (Bigger loans demand higher rates.)

Use that as a guide. If you have a poor credit rating, but say you aren't willing to pay more than 9% a year, you probably won't get any bids.

Most borrowers also include information about themselves and what they plan to do with the money, along with some positive financial information, photos and other interesting facts to attract possible lenders.

Think of your loan application as an advertisement for you.

Step 3. Monitor your listing.

Investors have 10 days to place bids, and you can follow the bidding on Prosper much like you can if you sell something on eBay.

Most investors will only fund a portion of your loan, say $400 out of the $2,000 you need. (Putting up only part of the money means they'll only shoulder part of the loss if you default.)

When the bidding is over, the lenders with the lowest bids are awarded your loan. The interest they offered is averaged and that's what you pay.

If after 10 days your loan has not been fully funded it will be taken off the site. You can, however, try again. The second time around you might want to increase the percent of interest you're willing to pay or provide more information about what you plan to do with the money.

Prosper.com has not released the percentage of loan applications that have been funded. But a spokesperson said applicants with high credit ratings had the received most of the loans.

That's not surprising. The site is just a year old and we suspect investors want to see how faithfully riskier borrowers will repay their loans before committing lots of money to them.

Step 4. Collect your money.

When the bidding is closed you will get your money in two to four business days.

Prosper charges 1% of the amount you borrow. So if your loan is for $1,000, the fee is $10 and you'll receive a check for $990.

Then you begin paying it back every month for three years. The payments, which are the same every month, and cover the interest and part of the principal, will be automatically taken out of your checking or savings account.

Your payments are reported to Experian, one of the three major credit reporting bureaus. Get your checks there on time and you'll boost your credit score, while any late pays will lower it. This is a great opportunity to raise your credit score. If you default on the loan, the amount owed will be turned over to a collection agency.

Prosper was launched in February 2006 by Chris Larsen, who is also a co-founder of E-Loan, the online mortgage lender. Zopa, which makes microloans in the United Kingdom is expected to expand to the United States sometime this year.

The concept was developed by Muhammad Yunus, founder of the Grameen Bank of Bangladesh. Yunus won the Nobel Peace Prize for championing microloans as a way to provide small businesses in developing countries with desperately needed seed money.

Maybe this new way of borrowing can help you, too.

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