Having trouble borrowing money for a personal or small business loan at a bank? I want to talk to you about another opportunity called peer-to-peer (P2P) lending.

P2P lending is a way to cut the banks out of the equation and allow people to go online to borrow and lend money directly to each other. Prosper.com is the granddaddy in the field, but LendingClub.com has been growing nicely in recent times too.

Other services include Kabbage.com (focus on e-businesses,)

How it works

Here's how P2P lending works for a potential borrower: You agree to a credit check and to disclose your debt-to-income ratio. Based on that information, you're assigned what amounts to a credit risk score. Taking that score into account, you're assigned a letter grade and APR befitting the credit risk you pose to potential lenders on these kinds of sites.

If you don't put a high enough interest rate based on your profile, most lenders probably won't touch you. That's one way they limit their risk. But lenders also protect their interests in P2P lending by buying little tiny slices and dices of multiple loans, instead of pouring all their dough into one big loan. That way if any given borrower defaults, a lender only loses a fraction of his or her money, not the whole amount.

An evolving business

In the early days of P2P lending, companies like Prosper and LendingClub didn't set high enough standards about who could borrow and they didn't adequately communicate to investors (lenders) about the level of risk involved. So the business model kind of blew up in everybody's face. Now the standards have gotten more refined and more sophisticated with time.

So you can consider using a site like Prosper or LendingClub to borrow, or, and I love this, you can increase the return you're now getting on your money by becoming a lender. If you want to take the time to learn from others, there are lots of free forums that have info and advice that will walk you through ways to lower your risk as a lender. (Just do a search for "P2P lending forums" using your favorite search engine.)

This could be a nice way to boost the return on your money that's earning 1% (if you're lucky) right now in CDs and simple savings!