Have you been gathering up courage, toes at the water’s edge, to dive into the rough waters of stock market investing?

Or maybe you have to giggle when your bank savings account shows a monthly interest payment that’s less than your monthly allowance as a kid.

On the other hand maybe you need a loan but don’t want to deal with bank bureaucracy and fees, or maybe your credit isn’t established enough to get a decent interest rate.

Given the current state of our economy, those of us just starting to enter the world of responsible adult finances are in for a crazy ride. Luckily, we also have some up-and-coming alternatives to traditional bank and investment options. A hot new alternative is Web-based peer to peer lending.

Peer to peer lending is also called social lending and person to person lending (P2P). The principle behind the various forms of P2P lending is that a low-overhead Website makes a better middle-man than a bank or credit card company—allowing borrowers to get lower interest rates and better shots at receiving a loan, while everyday people can “invest” their money as loans that generally have a higher rate of return than a savings account or stock investment.

How does P2P lending work?

The details are slightly different for each company, so here’s a description and breakdown of the two most popular, Prosper.com and Lendingclub.com, as well as a new platform for peer to peer lending specifically for students borrowing to pay for school—People Capital.

Prosper.com, a San Francisco based company, is currently the leader in peer to peer lending after completing a brief “quiet period” while the SEC tried to figure out how to treat them. Prosper performs a credit check on borrowing applicants, and if the applicant has a good credit score score (640+), he or she can create a listing with the loan amount and the maximum interest they’re willing to pay. Lenders can then checkout the borrower’s general credit health and purpose of the loan to decide what interest rate they want to bid.

The really cool thing about Prosper is that lenders have the option of financing a part (as little as $25) of the loan, or many loans, instead of one full loan. This helps spread the investing lender’s risk, should the borrower default. Prosper just combines the lowest-interest lender bids into an unsecured loan (meaning no collateral is involved) that must be paid within three years. If all goes as planned, investors with Prosper see a 7 to 11 percent rate of return—better than most savings accounts.

Borrowers can benefit from the competitive bidding to lower their interest rate, but must pay a processing fee to Prosper of 1 to 3 percent of the loan when the bids are in, as well as a closing fee at the end of payments. A plus is that, unlike many bank loans, Prosper doesn’t charge prepayment fees for an early full payment, and otherwise the monthly balance is automatically deducted from the borrower’s account.

Lending Club differentiates itself by focusing on a more personal connection between lenders and borrowers. Though the identities of both are kept private (to prevent late-payment kneecap busting, no doubt) borrowers can post a great deal of personal info on their profiles. This can influence similar lenders to pick them, or be used to explain unusual circumstances surrounding the loan, which a bank would likely disregard but a living, breathing person might be more sympathetic about.

As on Prosper.com, Lending Club’s unsecured loans must be paid off in three years, and lenders can choose to only contribute part of a loan ($25+). Lending Club has a 1 percent service charge to the lender, in addition to a processing fee of 1.25 percent to 3.75 percent for the borrower. The borrower’s interest is determined by their credit score. Interest can run between 7.05 percent and 21.21 percent for borrowers. Lenders in 2008 got a pretty sweet deal, with an average investment return of 9.05 percent even after accounting for early payments (where less interest can be collected), defaults and the service charge.

Lending Club posts regularly updated performance statistics so you can check the company’s pulse before jumping in, or if you get antsy afterward. Investors can also choose to put their notes up for sale on the website.

People Capital is different because it exclusively matches up student-borrowers with cream-of-the-crop lenders. Since most college students haven’t had time or knowledge to build up good history, People Capital projects a Human Capital Score after dissecting and analyzing GPA’s, standardized test scores, along with the borrower’s college and major to determine their ability to pay the loan back.

Another important difference between People Capital and most other peer to peer sites is that the FDIC insures their lenders up to $25,000. Along with the safety net, lenders face tougher criteria—such as having a net worth of $1 million or annual income of $200,000— to lend on People Capital than with other companies.

Borrowers benefit from People Capital because the unsecured loans are available even if they don’t have a credit history. People Capital also has several payment options so students going in to fields with considerable startup time can have a little slack on finishing payments. Lenders may appreciate the ability to sift through applicants to “sponsor” a student at their old alma mater, or one entering their field.

Have you used peer to peer lending, either as a borrower or lender? Post your experiences below!