Borrowing money from strangers used to mean going to guys with funny names at pool halls and paying sky-high interest rates. Now, you can go online and borrow from people you don’t know and pay rates lower than those offered by banks and credit card companies.

Known as peer-to-peer (P2P) lending, a growing number of sites such as Prosper.com, LendingClub.com and Zopa.com put you together online with people who are willing to spot you some cash.

Or, if you have at least $50, these sites also will let you sign up to become a lender and make money. But there are risks, such as borrowers who fail to pay on time or default on the loan.
Most P2P sites charge borrowers and lenders a 1-3% fee for processing the loan. Lenders are charged another 1% loan-servicing fee. Typical loans are under $25,000, have a fixed interest rate and last three years.

How P2P sites work for borrowers:

• You go to a P2P site, fill out an online form and open an account.

• The site checks your credit history and credit score. If your score is below a set level, you may be rejected.

• If approved, you type in how much you want to borrow and for what purpose. You also tell the maximum interest rate you’re willing to pay.

• Lenders then bid on your request, eBay-style, basing their decision on how high a credit risk you are. Sites list your credit grade—such as AA (low risk) or HR (high risk)—based on your credit score.

• If you accept an offer, the cash you borrowed is automatically transferred directly into your bank account.

If you miss a payment, sites will typically send you an email encouraging repayment. After 30 days, most sites will engage a nationally licensed collection agency, giving you 90 days to pay up. After 120 days past due, loans are sold by sites to a debt buyer, who make the lender partially or fully whole. At that point, your credit report is marked with the scarlet letter of a default.

How P2P sites work for lenders:

• You go to a P2P site, fill out an online form and open an account.

• Pick the loan level you want to bid on.

• View borrowers’ credit histories and credit scores.

• Bid on attractive borrowers’ loan requests.

• If a borrower selects you, the assets you committed to the loan are transferred out of your site account.

• Borrower payments plus interest are transferred directly into your account each month. Your gains are taxed as income.

What if a borrower doesn’t pay? The large guys with funny names are sent out. Just kidding. Sites say they notify the credit-reporting bureaus and assign a collection agency.

If a borrower defaults, some sites say you may receive some or all of what you’re owed by firms that buy debt and have the resources to recoup the loan. But ultimately, the lending risk is all yours. P2P loans are not FDIC insured, and a P2P site is not liable for your lending problems.