Lend Money at 12.8%

I've been lending out money on Prosper.com for almost four months now. I'm up to 15 active loans (at very small amounts), at an average interest rate of 12.8%, which is pretty incredible. To date I have only lent out money to AA and A borrowers, which means people with pretty good credit. The only catch is that I also lend to people with higher than average debt to income ratios.

One key question is why anyone with an AA or A credit profile would borrow money at such a high interest rate. Typically these borrowers can get money at 8% or less. One reason may be that given their high debt to income ratios, they simply aren't able to borrow anywhere else. Another reason, as my friend Will has pointed out, could be that they simply like the idea of having cash in hand. It's easy enough to get a line of credit somewhere if you have good credit, but perhaps the thought of having cold, hard cash in hand is more appealing.

I've set up standing orders on the site, which means that Prosper automatically bids on loans that match my criteria. So far all of my borrowers are "current" on their loans, and at my current lending rate, I can almost buy a latte a week off my earnings.

The question is, is this a good investment? Can a money manger and/or a fully diversified portfolio do better for me with less risk? I'm not yet diversified enough to handle a default. But with AA and A borrowers, the statistics say that I should be in good shape.