Peer to Peer Lending

SAN JOSE, CA -- Climbing interest rates and tightening credit standards are making it harder to secure a loan.

That's why some people hard up for cash are turning to an alternative where borrowers tap people, not banks, for cash.

It's a called a peer-to-peer lending network.

When Corey Bray graduated from college two years ago he had a student loan to pay off and he was close to $6,000 in debt.

His credit card interest rate was more than 20 percent.

The bills kept coming and Corey became more frustrated.

Instead of going to a bank to ask for a loan, he turned to a peer-to-peer lending network called Prosper.

The company promises a safe environment where family, friends and even strangers, can come together to borrow and lend money.

Borrowers are allowed to borrow up to $25,000.

"A borrower can come onto the site and decide how much they need to borrow. They put the interest rate they are willing to pay and they can actually express themselves in a listing and add a photograph," explained Prosper.com's Catherine Muriel.

Lenders go onto the site, look at the listings, and bid on the loans.

In 24 hours, Corey Bray says his $5,600 loan was funded and he saw his interest rate slashed down to 10 percent.

Maureen Young is a financial services attorney for Bingham McCutchen, an international corporate law firm.

She cautions those thinking about joining a peer-to-peer network to not treat it like another credit card.

"Individuals need to think about can they repay or should they be really saving the money before they decide to buy the car, or do the remodeling or whatever it may be," Young advised.

Lenders like Alexander Won say they have seen a better return on peer-to-peer networks than the stock market.

His rate of return is 20 percent.

Another lender, Katie Stokes-Guinan, sees this as helping out those in need.

"Even though you may not know the person, there is sort of personal competition. You know exactly where your money is going," Stokes-Guinan said.

Still, there are potential risks for lenders.

Prosper says its company will report you to the credit bureaus and the collection agencies if you don't repay your loan, and if this does happen peer to peer lending networks like prosper will not allow you to borrow from them again.

These networks will check your credit history and verify your bank accounts before you start asking for a loan.

In Prosper's network, you have three years to pay back your lenders.