What is social lending? It’s a new take on an old concept. Social (aka person-to-person or peer) lending sites are online communities where individuals can borrow and lend money over the Internet. Social lending has taken off in the last couple of years and could become a major source of loan money thanks to our shaky economic times. Almost a dozen sites now cater to U.S. investors.
Social loans offer something for everybody. For borrowers, interest rates are usually much lower than a bank’s. For lenders, interest rates are quite a bit higher than a CD’s. Everybody wins. Then there’s the personal element. Many lenders like the idea of helping others while earning a better-than-average return, and many borrowers say they would rather pay interest to another individual instead of a large corporation or a predatory lender like a payday loan outlet.
Who is the typical social borrower? Most do not want to pay high interest rates or do not qualify for a loan elsewhere because of poor credit. While reasons for borrowing range from vet bills to weddings, the most popular one (see the pie chart on this page) is debt consolidation.
The social lender plays the part of the bank. Lenders are individuals just like borrowers only with some extra money to invest. Lenders enjoy a better short-term return than a traditional institution can offer, around 10 percent on average. The cherry on top is the opportunity to lend a hand to someone who might not otherwise get to finish college or start a business.
Social lending sites have launched in almost every major country. In the U.S., Propser.com is the largest and best known mainstream site followed by Lending Club. However, Propser is currently not accepting new lenders while it completes a securities registration with the SEC. Loanio.com, just launched in October, is the newest online lending community. Loanio mimics Prosper’s eBay-like bidding system but offers some heretofore-unseen features, including a cosign option.
Social lending sites have launched in almost every major country. In the U.S., Propser.com is the largest and best known mainstream site followed by Lending Club. However, Propser is currently not accepting new lenders while it completes a securities registration with the SEC. Loanio.com, just launched in October, is the newest online lending community. Loanio mimics Prosper’s eBay-like bidding system but offers some heretofore-unseen features, including a cosign option.
Fynanz and GreenNote offer student loans. Virgin Money USA, known as CircleLending until airline and record industry mogul Richard Branson bought it in 2007, caters to friends and relatives who want to document an already agreed-upon loan.
Zopa.com is the only social lending site that offers lenders secured loans through its partner credit unions. The tradeoff is interest rates not much higher than a CD’s.
Kiva.org and MyC4 dispense microloans to the working poor in Africa, Latin America and other third-world parts of the globe. Though Kiva currently is a non-interest-paying charity and MyC4 does not repay loans to North American investors, we cover them here because of their social lending-like features, including lenders’ ability to choose their borrowers.
Finally, we cover MicroPlace.com because although it is not a social lending site, it looks like one thanks to profiles posted of past borrowers. And, like Zopa, it offers secured loans so you can sleep better at night knowing you’ll get your money back if a borrower defaults. Think of it as a low-paying social mutual fund that gives you a window into the lives of the people you might be helping.
Social lending can be risky. Unlike the traditional investment instruments with which we are familiar, most social loans are unsecured, leaving lenders in collection limbo if their borrower walks. Lenders can lower risk by diversifying: loaning very small amounts of money, typically $50, to multiple borrowers. Some sites, such as Prosper, offer helpful automated portfolio tools that choose borrowers based on a lender’s risk preferences.
Borrowers, on the other hand, can hardly go wrong with a social loan. Those who repay their loans on time can even improve their credit scores because social lending communities report payment timeliness to the credit bureau the same as banks.
As long as lenders continue to come, social lending sites will thrive. According to the Wall Street Journal, roughly $100 million in new social loans were issued in 2007. That amount will increase tenfold by 2010, according to Online Banking Report.