Is peer-to-peer lending right for you? A new alternative to traditional borrowing is springing forth.

PEOPLE ARE TURNING TO SOCIAL NETWORKING SITES to find friends, dates, and now money. The latest Internet trend is peer-to-peer lending, where participating members can borrow or lend money among themselves. While it may not be anything new to borrow a few bucks from a family member or best friend, most peer-to-peer members are strangers. Peer-to-peer lending presents opportunities to borrow money from a source other than a bank, says Catherine Williams, vice president of financial literacy for Consumer Credit Counseling, a division of Money Management International. "It appeals to those individuals who have extra cash to loan to someone in need." Much like microlending, loans can be as little as $100, she adds.

[ILLUSTRATION OMITTED]

Peer-to-peer lending goes beyond philanthropy, says Renaud Laplanche, CEO of the Lending Club in Sunnyvale, California. Lenders can get a rate of return of 9% to 12%. For borrowers, he says, the most common uses are refinancing credit card debt, paying for a one-time event such as a wedding or down payment on a home, covering medical expenses, and providing capital for a business venture. Loans vary from $500 to $25,000, but the typical borrowing amount is about $8,000. The process is different from a conventional loan in that borrowers post the amount they want to borrow and the interest they are willing to pay. They then select from a group of bidders.

The concept of people lending to each other online is still in its infancy, notes Edward Woods, a senior analyst with Boston-based research firm Celent. It was virtually nonexistent a few years ago, but now stands to grow from $118 million in 2005 to $5.8 billion by 2010, reports Celent. The more popular sites are LendingClub.com, Prosper.com, Zopa.com, and VirginMoney.com.

But not all peer-to-peer sites are alike. San Francisco-based Prosper CEO Chris Larsen likens his site to eBay. "Instead of products, people list and bid on loans. Lenders set the minimum interest they're willing to earn. It's important that you are realistic about the rates you ask for," says Larsen. "You might not get a loan because the rate is too low, or you might end up with a rate higher than you expected." Rates less than 7.25% would be too low, for example. And rates can be as high as 35%.

Zopa is affiliated with credit unions across the country, which members must belong to, and lenders invest in certificates of deposit and choose which borrowers get financial help. Also, Lending Club and Zopa require a FICO score of at least 640 and a debt-to-income ratio of no more than 30% and 50%, respectively. Virgin Money primarily serves as a mediator between friends and family who want to loan each other money. The site helps borrowers present a formal proposal, draw up a promissory note with interest, and develop a repayment plan.

NO MATTER WHAT TYPE OF BORROWING IT IS, LYNNE STRANG OF THE AMERICAN FINANCIAL SERVICES ASSOCIATION IN WASHINGTON, D.C., OFFERS THE FOLLOWING SUGGESTIONS:

1. Ask yourself if you can afford the loan. Evaluate your income and expenses to determine if you can comfortably take on an additional payment. Pay attention to the length of the loan terms. For example, the maximum term is 60 months on Zopa and three years on Prosper, which automatically deducts monthly payments from your checking account.

2. Be mindful of the ramifications for missed payments. If you don't make payments on time or if you default on the loan, it will show up on your credit report. Default rates of 1% to 3% can be attached to loans.

3. Make sure the site is secure. You are going to be submitting sensitive information about your finances and your identity. Does the site offer fraud protection?

4. Look at state restrictions. Your state might limit how much money you can borrow. Most sites post this information.

5. Comparison shop. Take at look at what interest rates are being offered through peer-to-peer sites as well as traditional lenders. It is all risk-based pricing, so your credit score is among the factors that a lender will assess to determine your interest rate.