Re:Sounds like the Bond Market to me (Score 1)

Statistically speaking, the risk of default *is* knowable. For a given credit grade there is a historical default rate. Therefore if I make one loan (or 5 or 10) you are correct, I don't know whether those are going to default. If I make 100+ loans however, I should start to see default rates approaching market norms for that credit grade. This really is the credit-union approach, only with more direct benefit to the lenders. Several lenders pool their money and make a loan to the same borrower. Because you're not (typically, some lenders are) lending to 1000s of borrowers it is indeed more risky than simply putting your money into a credit union, but the reward (interest rate) is much higher as well. Atlantageek has a graph of risk adjusted interest rates on his site. ---- See my personal finance blog for more...