IOU Central, a person-to-person online lending system, launched its website today. IOU is an Internet-based system that allows people to borrow and lend money directly from and to other people.

The concept, dubbed social lending, is not new, but IOU says it is the first to launch in Canada.

Essentially, IOU provides a platform for borrowers and lenders to meet. Someone who needs a small loan posts a request on a listings board. This request includes their credit score, the desired borrowing amount, the term of the loan and the maximum interest rate they are willing to pay.

If the borrower provides additional information (such as his/her income and housing expenses), IOU Central can then calculate the borrower’s debt payment to income ratio and housing expenses to income ratio.

People with extra funds to invest can become lenders. Lenders bid on the loan request by stating the amount they are willing to loan and the rate they are willing to accept. After two weeks on the board, the bids with the lowest rates are combined together into a single loan and the company transfers money from all of the lenders accounts into the borrower’s account.

IOU’s founder and CEO Phil Marleau says the system is aimed at do-it yourself investors. “That’s the core idea here,” he said in an interview. “It’s really what Scottrade, or E-trade or Charles Schwab did to stocks, we’re trying to empower the individual to be their own banker.”

Marleau says his service provides investors, who may already be involved with stocks, bonds or real estate, with a different asset class. “This is consumer loans,” he said. “That can help investors diversify their investment portfolio.”

Prior to founding IOU Central, Marleau was a principal at Palos Capital, a Montreal based investment management firm. He’s also held roles at Scotia Capital in Toronto and was a vice-president of equity research at Merrill Lynch in New York.

Social lending sites such as U.K.-based Zopa and U.S.-based Prosper have been up and running for a few years. In today’s problematic credit markets, these sites have kept their rates low, while traditional lenders have raised rates. Zopa limits its site to prime borrowers and boasts a 0.1% default rate, while Prosper has a wider borrowing range and has a 3% default rate.

Using IOU Central, a borrower can apply for a personal loan between $1,000 and $25,000 and for a term of up to 3 years. The lender, on the other hand, can bid on a loan in amounts ranging from $25 to $25,000. “The idea is that we want to make it easy for lenders to diversify,” said Marleau. He says IOU facilitates risk diversification by allowing lenders to bid small amounts on many different loans.

The platform handles payments by withdrawing funds from the borrower’s account and depositing them into lenders’ accounts until the loan is fully repaid. IOU Central is not directly insured by the Canada Deposit Insurance Corporation (CDIC), but all deposits are covered by CDIC pass through insurance, which is provided by its banking partner, the National Bank of Canada.

“Usually you can only go to a traditional financial institution, and now this is a different way for lending and borrowing,” said Marleau.