In these rough economic times, traditional bank loans are drying up. People previously eligible for loans are getting turned away. This week The Wall Street Journal reported that it's hard to get a car loan right now. The same is true for student loans and mortgages.

As a result, some borrowers are treading into new waters: the world of peer-to-peer lending — where everyday people lend their money to everyday borrowers.

"Since the credit crunch we have been seeing more credit worthy types of users," says Chris Larsen, the CEO and cofounder of Prosper, one of the better known peer-to-peer lending companies.

Larsen describes peer-to-peer lending as "eBay for loans" where lenders and borrowers meet each other online. Borrowers post the reason they need a loan, the highest interest rate they're willing to pay and their background information. Their credit rating as determined by the site is also posted. Lenders place their bids and then the borrower selects the most attractive ones.

Future lenders may see an opportunity to make money on these sites at a time when markets are roiling. It's an added bonus to get to know the borrower better to feel more secure in lending to them. But making these loans has its risks. Unlike putting your money away at a bank, these loans are unsecured. This means that lenders aren't protected by FDIC insurance if their borrower defaults on the loan.

Larsen reports that Prosper has had fewer than 10 percent of users default in the three years the site has been active. He added that Prosper will try and work with a defaulting borrower for a month before passing their debt along to collectors.

Intrigued? Financial journalist Marc Myers tells us you should consider these factors before diving into peer to peer lending:

• Check your credit score. P2P sites base your eligibility and posted credit risk on your credit score. Participating in a P2P site as a borrower or lender doesn't affect your credit score right away. Most sites do a "soft pull" to evaluate your creditworthiness when you apply for a loan. Only when your loan is fully funded and you accept it, will a hard pull show up in your credit report. Some sites will only report you if you default, while others, like Prosper, will report on-time payments and delinquencies to credit bureaus.
• Know what you need. Calculate how much you truly need to borrow. Don't ballpark. The less you need, the lower your monthly tab and total interest paid over three years.
• Run the numbers. Figure out how much you can afford to pay each month, which in turn will help you set your interest rate.

As a borrower:

• Check the longevity. See how long a site has been in business. Make sure the site has a good track record before you sign up.
• Determine the specialty. Before you choose a P2P site, see which ones focus on your needs. Check out our list below of the different kinds of sits that are around.
• Measure client satisfaction. One way to do this is to check independent online chat groups and read the praise and complaints. You can do this by typing into Google "P2P site + forum."
• Know the terms. Read the site's frequently asked questions to understand the rules, fees and risks—and minimize disappointment.

As a lender:

• Do your due diligence. Check the site's longevity, client satisfaction and bank the site uses (see above).
• Vet the borrower. Like eBay, many sites let you see buyer information and even contact the borrower. Getting to know your borrower and their need better will make you feel more secure about lending money.
• Understand the risks. Most P2P sites explain the risks you face as a lender and what the site will and won't due if a borrower is late paying, does not pay or defaults.
• Consider making several small loans rather than one large one. This strategy will help you diversity your risk and improves the odds of higher returns, since you'll likely hold many loans with different rates rather than just one.

Looking for a peer to peer lending site? Check out these companies, and be on the look out for more as this trend continues to grow.

• Prosper: The first P2P lending site launch in the U.S. Facilitates borrowers and lenders with the max loan amount at $25,000.
• Virgin Money: Focuses on lending between known peers — family and friends.
• GreenNote: Helps generate loans specifically for students in need.
• Lending Club: A general peer to peer lending site, but currently frozen. No new lenders or commitments from existing lenders while undergoing a registration process with the SEC.
• Pertuity Direct: Launching this month, it will be another general peer to peer lending website.
• Swap-A-Debt: Launching in late October, their mission is "to create the most efficient non-institutional, Internet-based lending community ... to make personal loans in which both parties benefit."

-- Susie

*This post was updated with information on Prosper's credit reporting methods on 10/9.