Three Types of P2P Lenders:

1. Match Makers for Direct Loans

These firms help previously unacquainted borrowers and lenders connect. Prospective borrowers provide details of their circumstances and the intended use for the funds they are seeking. Often, there is an auction-like process, where lenders bid against one another to loan funds to an individual borrower. Lenders bear the risk of nonpayment. Interest rates depend upon what the bidding market allows on a case-by-case basis.

Compare these (Prosper, Lending Club & Loanio) as a Borrower or Lender

2. Facilitators of Indirect Loans

These firms are middlemen between previously unacquainted borrowers and lenders. The difference from #1 above is that these loans are indirect or pooled, meaning that lenders don't choose and directly lend to individual borrowers. Some of these firms amass a pool of funds from lenders and lend to scores of borrowers, thus spreading out the default risk. Another arrangement in this category has lenders buying an FDIC insured CD (certificate of deposit) from a financial institution, earning interest that's maybe a bit higher than other CD's, and earmarking funds to borrowers of their choosing, without bearing any related risk.

Compare Zopa vs. GlobeFunder as a Borrower or Lender

3. Friends and Family Go-Betweens

When borrowers and lenders already know one another, these companies formalize loans by creating written documents, reflecting the interest rate and repayment terms the parties have agreed upon. Sometimes these companies will also "service" loans, meaning they collect funds from one party and transfer them to another.

Compare these (Virgin Money, LoanBack & Nolo) as a Borrower or Lender

Learn More About How P2P Lending Works