Looking to Lend on Prosper.com

As a lender, you have a choice of a range of borrowers based on credit ratings, from AA through HR (High Risk). The rate you get goes correspondingly higher the more risk the loan.

Here's an example of the Credit ratings and default rates that Prosper cites from historical Experian data.

Rating Avg. Default 
  AA     0.20%
  A      0.90%
  B      1.80%
  C      3.30% 
  D      6.20%
  E      10.40%
  HR     19.10%
NC Cannot estimate (no credit history)

Reasons borrowers request a loan are interesting and varied. There are some downright bad borrower ideas- for instance, borrowing money (at rates around 10% or more) to invest in the stock market. This is just plain dumb because you are starting off with a 10% handicap, and over long periods of time, the U.S. stock market (S&P 500 Index) returns around 10.2% so you are unlikely to make much money borrowing at 10% interest. The fact is, most PROFESSIONAL mutual fund managers are unable to consistently beat the S&P 500 Index.

Another often-seen borrower on Prosper is someone looking into borrowing money to lend to more risky borrowers on Prosper. Borrowing (even at reasonable 7% rates) to lend to riskier borrowers is a rather risky proposition. You're starting with a 7% or more rate handicap due to your loan interest, and you're exposing yourself to a huge amount of risk as a borrower lending to even more risky borrowers.

So, should a lender part a fool from his/her money? Or should a lender try and educate them on their folly? Or just avoid these loans altogether? Hard to say. My inclination is to find loans that are for a good purpose, loans that will help someone, make a difference in their lives in a positive way, while earning a fair return.