Community Lending Websites offer Loan Auctions between regular people, similar to merchandise auctions on eBay, that allow you to get a loan if you’ve been turned down for loans by traditional lending institutions.

If you can’t get a loan from a traditional lender, or even if you can and you want to explore alternative loan options with the possibility of lower interest rates, you may want to consider a peer-to-peer lending network.

If you have additional savings that you’d like to invest, peer-to-peer lending groups provide you with the opportunity to lend money at lucrative interest rates, but you’ll have to choose loans wisely in order to minimize your risks.

Prosper.com has done over 81 million in loans and is the most popular of the community lending websites in the U.S., but Zopa.com is a leader in the U.K. and will be launching in the U.S. soon.

Here’s how peer loan networks work.

Borrowers list the amount of money they need and the highest interest rate they are willing or able to pay, and then lenders bid on the portion of that loan that they are willing to lend with the interest rate they are willing to offer.

When the listing ends, the borrower gets their loan at the lowest possible interest rate, and the lenders get paid off over a set period of time while earning a profit on the interest charges.

The community lending websites make their profit by charging borrowers a small percentage of their loans and charging lenders a small percentage of their payments received, so lenders and borrowers have to take that into account when calculating APRs.

The benefit for borrowers is that you’ll have the opportunity to get a loan that you otherwise may not have access to and possibly with a lower interest rate, although not always.

Peer loan networks are especially beneficial for poor credit borrowers that have been turned down for loans by banks and other lending institutions. Lending communities can offer you a last chance loan if you’re desperate to consolidate high-interest credit card debt or just can’t get a loan anywhere else.

However, these loans will adversely affect your credit if you don’t follow the terms of your loan and make your payments, so it is important to borrow money wisely and make your payments on time. Doing so will rebuild your credit and give you the opportunity to receive better interest rates in the future.

Some borrowers with average credit may be able to get better interest rates on loans than they would through traditional lending institutions, but that is not always true, so review current loan listings for similar loan requests to see what type of interest rate you can expect to receive. You’ll also have to consider the additional fees that the lending networks will charge.

However, borrowers with above average credit or excellent credit will probably get better interest rates through traditional lending options such as personal bank loans, lines of credit and credit card loans.

Lenders interested in making some money through lending networks will have to choose their borrowers wisely and consider the risks.

Although you can get a higher interest return from borrowers with poor credit, the risk is also higher making it more likely you’ll never get the full amount repaid. These are unsecured loans, so if the borrowers don’t pay, you may not get your money back. Defaulted loans go into collection and eventually get sold off or possibly just written off. Either way, you could lose money.

On the other hand, if you diversify your lending by making small loans to multiple borrowers with acceptable risk levels, you can get a really nice return on your investment, but it will definitely require research and diligence.

It’s worth mentioning that not all lending websites are for profit, and networks like
Kiva.org allow concerned community members to lend money to people in developing countries that seek loans to grow their businesses or otherwise advance themselves.

Personal lending communities or peer-to-peer loan networks offer a viable option to traditional lending institutions, especially if you can’t get a loan, have poor credit, or are otherwise unable to obtain a loan with an interest rate that you can afford.