Person-to-person lending

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Person-to-person lending is lending done between individuals circumventing the bank's traditional role in this process.

Community lending had the advantage that people's interpersonal relationships fostered increased fiscal responsibility. The risk was that without the benefit of diversification, when something went awry the entire community could suffer.

Lending through banks has benefitted from scale and diversity. By pooling the available money supply and lending it out again, the impact of any one default would be trivial in light of the timely payment of the vast majority of the notes. The downside to this model is that it has introduced greater transaction overhead and removed community loyalty from the equation.

New ventures are seeking to blend traditional practices with new scale economies via online marketplaces. The marketplace serves many functions. Most notably it facilitates bringing borrowers and lenders together. Furthermore, it simplifies what might otherwise be a cumbersome process to properly document and service the resulting loans.

It is hoped not only that these new markets will be more efficient by removing the bank as middleman, but that factors leading to default can be mitigated by reintroducing a social component to the mix.