If you don't have well-heeled relatives or simply don't want to ask a relative for a loan, you'd be better off going to Lending Club or Prosper, Arnold said. These sites aim to bring strangers together to finance small businesses, refinance credit card loans and provide loans to students.
Because the borrowers and lenders don't know one another, there are safeguards built in on both sides.
To protect borrowers, lenders are not given access to the borrowers' personally identifiable information. That reduces the chance that an anxious lender will directly contact a delinquent borrower for payment. (Borrowers who go delinquent do need to worry about collection agents, though.) Once lenders agree to fund a certain loan, they're not allowed to back out, so borrowers also don't have to be concerned about having promised credit ripped away.
To protect lenders, the sites pull credit reports on each potential borrower and turn away borrowers whose credit scores don't meet minimum standards. Both Lending Club and Prosper have grading systems to handicap the likelihood that a borrower will default. Lenders use these risk profiles to determine whether to fund a loan and how much interest should be charged. You would, for example, expect a higher return on a C-rated loan than on one that has an A.
Prosper, which revamped its site after a recent registration with federal Securities regulators, actually demands that lenders get returns that are commensurate with the risks they're taking, a company spokeswoman said. To determine interest rates, the company uses the going rate for a low-risk investment such as a certificate of deposit and adds points based on the likelihood that the borrower will default. So if the going CD rate is 2.5 percent and the loan you've bid on is calculated to have a 6 percent potential default rate, the site will not allow the interest rate on the loan to fall below 8.5 percent.
To figure out the risk of default, Prosper uses a formula based on the borrower's history and its own experiences.
"We have a system that we think ensures that both sides get a fair deal," said Chris Larsen, Prosper's chief executive and co-founder.
For those who have money to lend, peer-to-peer borrowing represents an investment -- albeit a risky one.
"I could invest my money and get 2 percent in a money market account or I can get 7 percent to 9 percent lending it out," said Arnold, who has invested his own money in person-to-person lending. "And if you're able to lower somebody's credit card rate to 9 percent, that's great for them too."
But making loans is risky business, said Bobbie Britting, research director of consumer lending at TowerGroup.
"Any borrower could have their circumstances change and find that even if they wanted to make their payments, they're not able to," she said. "Most of these are unsecured loans (not backed by collateral such as a house or car) and those are the riskiest."
Since its inception in 2006, Prosper has registered a 19 percent default rate, Larsen acknowledged. The company has significantly tightened its lending criteria in the last few months and no longer accepts subprime loans, so Larsen expects that rate to improve. However, even Virgin Money reports that about 5 percent of its borrowers don't pay on their loans either.
Britting says that defaults shouldn't dissuade lenders from jumping in. But she urges investors to diversify -- never lending more than they can lose to one borrower and spreading their loans around.
"You should ask yourself if you can afford to lose 20 percent of your investment," she said. "Lending is inherently risky. You have to be prepared for that."