At times when the cost of credit in the mainstream market rises, subprime borrowers, who have to pay even higher interest rates, can find their chance in the arms of social lenders. Because peer-to-peer lenders, such as Prosper, don't face the same constraints during a financial crunch as normal banks, they are able to charge lower rates and prosper.
In this system, where individual lenders compete for specific borrowers, borrowers can receive interest rates lower than from traditional banks, while letting lenders earn better returns than in money market or savings account.
SmartMoney has tips on navigating peer-to-peer sites and The Economist explains the limits of "crunchless credit."
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