Desiree Vargas Wrigley graduated from Yale University wanting to make the world a better place. She decided to create a crowd funding Web site where people could raise money for all types of projects and businesses. She used her own savings, money she earned working for the Kauffman Foundation in Kansas City, MO, and waited tables for eight months to try and raise the $30,000 she needed to have a Web site developed.

But it was two sisters – one of them in need of a lifesaving kidney transplant – that helped Vargas Wrigley find her business calling.

Amy Cowin, 22, wanted to donate a kidney to her older sister, Jessica, 25, but they needed to raise $31,000 to pay for the procedure. Their plight inspired Vargas Wrigley to change the focus of her crowd funding business to be used specifically to help people raise money to cover the costs of expensive medical procedures called GiveForward.

She teamed up with an investment partner, Ethan Austin, who contributed $25,000. But Vargas Wrigley said she was still short $10,000. That’s when she learned about online peer-to-peer lender Prosper. She signed up, applied  and received a $10,000 three-year loan, which she was able to pay off in a year and a half with no prepayment penalty.

“The interest rate was definitely better than my credit cards were at the time,” said Vargas Wrigley, who was recently named by Crain’s Chicago Business magazine as a “Woman to Watch in 2011.”

Through GiveForward, Jessica and Amy Cowin were able to raise the money  needed for the transplant within 30 days. Their GiveForward campaign attracted the attention of doctors at Northwestern University Hospital, where the procedure was performed successfully. Today, both women are healthy, and appear on the home page of the GiveForward Website.

Desiree Vargas Wrigley, Founder,  Give Forward. Photo Credit: Seth Kravitz

Today, peer-to-peer lending sites such as Prosper and Lending Club allow its members to directly invest in and borrow from each other, making traditional banks obsolete. Both sites are based in San Francisco and use a basic model that streamlines the process of getting a loan over the Internet. It is easy to sign up and approval can happen within minutes. If the borrower qualifies, the peer-to-peer lender will then assign the loan a rating based on the borrower’s personal credit score, which it uses to determine the interest rate. The peer-to-peer lender essentially underwrites the loan in the same way a bank would, identifying the risk and ability to repay the loan, then lists the loan on its Web site for investors to consider.

“The real innovation is that we enable any person to invest like a bank. It’s really a very broad range of people,” said Chris Larson, CEO of Prosper. “It’s for average Americans who want to make a good return while getting the sense [that] they’re helping to grow small businesses. They can support friends and family or people they don’t know. ”

Investors can invest as little as $25 per loan. Once the loan has been listed on the site, it takes an average of five days to release the funds directly into the borrower’s account. It could take as little as two days or as long as two weeks.

Lending Club, founded in 2006, offers loans for three or five years ranging from $1,000 to $35,000; Prosper, created in 2005, offers one-, three- and five-year loans ranging from $2,000 to $25,000. Both sites offer fixed rates with no prepayment penalties but neither site limits lending to small business. Borrowers can apply for loans for a range of needs, from home improvement to debt consolidation.

“So this is a very different beast. Credit cards have variable rates but these are fixed. Your monthly payment stays the same throughout the entire lifetime of the loan,” said Scott Sanborn, chief marketing officer for Lending Club, adding it’s a win-win for borrowers and investors. “Those loans immediately start repaying the next month.”

As a result, peer-to-peer lending has experienced a surge since the banking crisis made it nearly impossible for startups, as well as existing firms, to get a line of credit.

“The company really came at a perfect time. Even creditworthy borrowers were not able to access credit. On the investor side, they saw the value of their equity portfolios drop by 40 percent,” Sanborn said. “We’re able to create value on both sides. Borrowers get lower rates; investors get strong stable returns,” Sanborn said, adding annual returns average 9 percent.

Larson said Prosper’s loan activity has increased 73 percent in the last six months and has experienced double digit increases for seven months.

“We look at this as a new way of banking that is enabled by the same technologies that have made eBay and Facebook so popular,” Larson said.

But a lot of business owners have never heard of this financing alternative.

“Peer-to-peer has been turbocharged by the Internet, but conceptually, it’s probably one of the oldest forms of financing because it predates banks,” Sanborn said.  “We’re different from a bank in that we’re actually making loans. And the difference is that the loans are funded by investors as opposed to bank deposits.”

Sanborn goes on to explain that unlike traditional banks that loan money and keep the interest they earn off those loans, the peer-to-peer model passes the return straight on to the investor, who buys notes equal to a fraction of the loans. “For instance, you wouldn’t loan me $10,000, you would loan 400 people $25 each,” Sanborn said.

The process of getting a loan through a traditional bank can take up to three months. After applying for a $20,000 loan at Lending Club to open her motorcycle repair shop, Nansee Kim-Parker of San Francisco said the funds were deposited into her account within a week.

Tokyo Moto Motorcycle Sales and Service

"It’s totally awesome. I didn’t know about it until I actually tried to find funding,” said Kim-Parker, an engineer who is an avid motorcycle rider and married to a motorcycle mechanic.

Kim-Parker said she needed about $50,000 to start the business, including acquiring a location and renovating the space. She used her own money, borrowed against her 401k and sold stock to raise the cash. She reached out to investors, but a potential partnership fell through at the last minute, leaving her $20,000 short of her goal. Kim-Parker applied for and received a $20,000 three-year loan from Lending Club with a 9.85 percent interest rate and opened the shop, called Tokyo Moto, in April.

Tokyo Moto Motorcycle Sales and Repair

"Now that banks are merging, they’re looking into futures and derivatives, not mom and pop shops,” Kim-Parker said. “I feel like peer-to-peer lending does that. It’s more like a village is funding your loan. I wrote kind of a little essay on why I need this money, what I’m spending it on and gave them a little background on myself and the business. I think that is why I was successful in getting my full loan request.”

She said Lending Club was also a great way to ask friends and family to invest in her business. “This takes all that uneasiness out,” Kim-Parker said. “Holidays can be enjoyable instead of ‘When are you going to repay the money you owe me?’ ”

Some businesses use peer-to-peer lending as a bridging mechanism, Sanborn said. Vargas Wrigley, 29, who now resides in Chicago, said she used it to help save lives.

“Empowering friends and family to come together and eliminate that feeling of helplessness that they feel when someone is ill,” she said. “It lets patients know that there is someone with them on their journey.”