From the Ground Up

But he's still skeptical about the concept of peer-to-peer loans.

"My concern is people are depending on these loans instead of building a sound financial plan, like having an emergency fund," he said. "People can just use these sites as another credit card to fund a vacation or anything else under the sun."

People who use such sites to lend money are mostly protected from losing their money, he said, because the sites check credit backgrounds and keep borrowers on a structured repayment track. Those who fail to pay run the risk of being reported to collection agencies. Diversification is also possible. Lenders can distribute money in a variety of amounts and at different rates.

Konrad Berk of Towson is one lender who is willing to take the risk. He's invested a little less than $10,000 in loans to strangers through Prosper. Each loan is for no more than $50, allowing him to create a diversified portfolio of interest rates.

After he secures an interest rate of, say, 11 percent on a loan, Prosper takes a cut, and a default agency does as well. After accounting for those fees, his return wouldn't exceed 9 percent, he said.

In the 10 months he has loaned money through Prosper, a few borrowers have missed payments -- several in a row, in some cases.

"You don't know how a given default situation will work out in the future," he said. "A borrower could resume payments or stop paying altogether." He said he has accepted the fact that he may not get paid back for a few of the loans.

Still, Berk said he likes the "social benefit" of peer-to-peer lending networks. "I feel like I'm contributing," he said.

Virgin Money focuses on facilitating loans between people who know each other. Chief executive Asheesh Advani started the company in 2001 as CircleLending before it was acquired in 2007 by Richard Branson's Virgin empire. The company has overseen $350 million in loans.

Virgin Money borrowers are considered to be in default if they are more than 60 days late on a payment, Advani said, and the default rate is about 3 percent. If a borrower misses a payment, lenders can choose to add an extra payment to the end of the loan, spread it over the life of the loan or double up on the next payment. They can also choose to forgive the payment.

"In my view, the flexibility is the secret sauce to peer-to-peer lending," Advani said. "Especially in today's jobless, growthless economy, people tend to have shorter-term jobs or are unemployed, but they are perfectly good credit risks."

Some students have turned to similar social networking sites to fund their educations. Carmina Alvarado, a graduate student at Santa Clara University in California, raised the $3,000 she needed for summer school through GreenNote, a two-month-old company that helps students secure private loans by tapping into their social circles.