Peer-to-peer (P2P) lending, sometimes called person-to-person lending or social lending, is a form of borrowing and lending that involves two or more parties that forego traditional financial institutions in lieu of exchanging money personally or through the Internet. Peer-to-peer lending has been around in one form or another throughout history, however, it has become far more common in the age of the Internet, which allows money to be transferred between geographically disparate parties.

There are two models for person-to-person lending: the auction model and the “friends and family model.” In the auction model, a potential borrower announces that she would like to borrow a certain amount of money. Many different lenders can then bid (by offering different interest rates) against one another for the right to lend the money. Because of the competition, the borrower tends to receive a lower interest rate than in a traditional banking situation.

This situation may sound like LendingTree’s model. However, typically the lenders who compete to give you a loan when using LendingTree are banks, which means that LendingTree only offers conventional loans, not peer-to-peer pending.

The “friends and family model” does away with auctions entirely in favor of a more direct lending arrangement. In this model, a lender gives money to a borrower with whom she is familiar, hence the name “friends and family.”

Over time, the definition of “familiar” has broadened. At first, lenders would only make loans to companies or people they knew personally. However, as the Internet has expanded, many Web sites are now acting as loan matchmakers, which allow those who need money to register on a Web site so that those who have money can offer a loan.

Today, there are many Web sites that offer peer-to-peer loans including 40billion.com (United States), Loanland (Sweden), maneo (Japan), and Kiva.org (global).