Micro-lending is one of my 20 passive income streams. I currently have 45 loans on Prosper.com, lent out at an average rate of 19.55%. Even though I’ve had a few delinquencies, my capital has grown 14.5% in the 15 months I’ve been a lender. I’ve learnt a few things about lending and how to protect your principle. While I won’t explain how to lend money on prosper, I will explain how not to lend money!!

Here are the Top Ten Worst reasons to lend money to borrowers:

1. You think they’re hot!
2. You feel sorry for them.
3. They have a picture of a cute kitten or puppy (or supermodel) in their profile.
4. They’re 95 and need money for medical bills.
   
5. They’re a Californian real estate investor and are willing to pay 20% interest for a remodel.
6. They need $25,000 for college and are willing to 25% interest for it.
7. They’re terminally ill and need a new fridge.
8. They look like they’re 65 and are smoking in their photograph.
   
9. They make $200,000 a year and need to borrow $5,000.
10. They’re buying a business and want borrow the 20% down-payment.

So far I’ve had a really good experience with micro-lending on Prosper. Prosper also has a new tool that automatically calculates the estimated chance of loss based on several criteria like the the borrowers credit and number of delinquencies. That gives you a good idea of what minimum interest to charge to overcome your losses.

If you’re interested in signing up, Prosper is offering a $25 incentive to new lenders.