With all of the controversy in the credit industry these days, it seems that social lending is putting a positive spin on an otherwise dire situation. Credit card companies have doubled interest rates, lenders have stiffened their qualification process and consumers in general are having a harder time finding money for their needs. Experts are beginning to surmise that social lending can help significantly within the nation to free up credit for consumers and bring the financial market back up to speed. [Read more…]
By Tamsen Butler
Social lending sites can help keep friendships and family relationships intact
You need money. Your mom, your Uncle Harry or an old college buddy has money and is ready to lend it to you.
That’s great! Keeping money all in the family is a popular way to go even for people who don’t have problems qualifying for a loan. A private loan can save you tens of thousands of dollars in interest that otherwise would go to the bank.
But how to set up the loan to everyone’s benefit? More importantly, how to make sure a problem with the loan doesn’t screw up the relationship?
After the all-too-awkward conversation that’s sure to take place about your loan terms, you could download an inexpensive promissory note form from nolo.com and do the paperwork yourself. Better than a handshake, it would at least put the interest rate and payment schedule in a notarized document.
The downside is you still have to remember to write a check every month. And if for some reason you forget to pay Uncle Harry? It could be a chilly reception at the next family reunion.
Person-to-person, over the Internet
A better way to borrow from someone you love might be to use a social lending (aka person-to-person or P2P) site. These loan sites not only draw up the paperwork, they service the loan for you, automatically deducting payments from your bank account and sending out reminder notices. Most services let more than one friend or family member chip in, spreading the risk; the site automatically disburses payments to everyone owed money.
Best of all? If you miss a payment, you can hash it out with the social lending site, not your mom.
Which site is best for family and friends?
Mainstream social lending sites like Prosper.com and LendingClub.com are really designed for stranger-to-stranger lending a dentist in the Midwest, say, loans a guy in Jersey the money he needs to start a pizza parlor. However, both Prosper and LendingClub claim they are also good places for friends and family to formalize loans.
The advantage to using a site like Prosper, LendingClub or Loanio.com to process a loan is that more than one person can loan you money and the site will automatically figure out and disburse scheduled payments. The disadvantages are that you have to formally qualify for the loan and pay a loan origination fee. Plus you have little control over the terms. This is especially true at the LendingClub.com, which assigns an interest rate based on your credit rating ranging anywhere from 7.88 percent to 18.61 percent. Ouch.
Their auction format gives you a little more control over the interest rate at Prosper and Loanio. Plus, any Prosper lender can start a Group to support specific borrowers. For instance, your dad could form a group called LoanForGary, which would let you invite pals and relatives to help fund your loan.
Owe less at Zopa.com
If your credit is good and you have more than a few friends and family members lined up to lend you money, the unusual Zopa.com might be a very good option.
Rather than use the person-to-person formula, Zopa requires that lenders first open an FDIC-insured CD with one of its six partner credit unions. Lenders must then “gift” some of their CD interest to lower the rate of one or more Zopa borrowers of their choosing.
Zopa currently pays a starting CD interest rate of 3.75 percent, so your lenders will have to be happy earning a very low rate. However, if enough people gift a portion of their interest earnings to help you, your interest rate can be driven down to nothing. Zopa could even wind up owing you money!
There are just a couple of catches: to borrow through Zopa you must have a minimum credit score of 640 and a minimum monthly income of $2,000.
Less hassle with Virgin
Saving what is probably your best choice for last, there is Virgin Money USA, the only site that does nothing but process personal, business, mortgage and college loans between family and friends.
There is no approval process to use Virgin’s services, and no need to divulge information any more personal than basic contact information. You and your lender decide on the terms – interest rate, length of the loan and payment frequency – before you sign up.
The site offers lots of tools to help you hash out the loan beforehand, including a loan calculator that lets you compare your Virgin-processed loan to a bank’s to see how much interest you save. Virgin also lists the IRS’ minimum interest rates allowed for private mortgages by state, a very handy feature that could save you tax headaches later.
Virgin drafts loan paperwork for a one-time fee of $99. For complete servicing that includes electronic funds transfers, year-end statements and e-mail reminders, the fee is $199 plus $9 a payment.
And if you default? Virgin restructures loans at no extra charge to keep the payments flowing and your relationships running smoothly.
Virgin’s only downside is that its automated system is not set up for repaying multiple lenders.
Staying friends with social lending
Loaning or receiving money from a friend or relative can be a great option, but the arrangement can quickly turn sour if you miss a payment. With a neutral third party like a social lending site you’ll have to pay some fees and fill out a few forms, but who knows? It just might save an important relationship.
What is social lending? It’s a new take on an old concept. Social lending sites (sometimes also called peer to peer lending sites) are online marketplaces where individuals can borrow and lend money to each other. 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. After an initial industry shakeout due to SEC concerns, two leaders have each now facilitated over $100 million in loans, while several specialized companies are also demonstrating noteworthy growth.
Social loans offer something for everybody. For borrowers, interest rates are usually much lower than a bank charges. Reasons for borrowing range from business funding to vet bills to weddings, the most popular loan purpose is debt consolidation. With rates often below 10%, it’s no wonder that borrowers are flocking to social lending sites to refinance their costly credit card debt!
For lenders, interest rates are quite a bit higher than they can earn via certificate of deposit or many other fixed income investments. Then there’s the personal element. Many lenders like the idea of helping others while earning a better-than-average return, and sometimes even strike up online or even real world relationships with their borrowers! Lenders can usually invest as little as $25 into a single loan, giving them ability to easily diversify their risk and create a portfolio that cuts across different geographies, loan purposes, risk ratings, and rates.
While social lending is more established in Europe, the concept is now entering its fourth year in the United States with two market leaders beginning to emerge. Lending Club has facilitated more than $100 million worth of loans and has attracted substantial investor backing, having raised $53 million from leading venture capital firms. Meanwhile, rival Prosper.com is approaching over $200 million in originated loans and has its own $40 million war chest to fund future growth. Prosper built a substantial market share lead over Lending Club and other early market entrants, but was forced to suspend lending for much of 2009 due to SEC concerns over the issuance of unregistered securities. Both companies are now compliant with the SEC, but Prosper’s break from loan originations enabled Lending Club to grab a large market share lead. The battle between these two competitors will be interesting to watch!
Social lending can come in a few different flavors as well.
Virgin Money, part of Richard Branson’s Virgin empire, is not a marketplace but instead helps groups of friends and family structure loans amongst themselves. If a borrower and lenders have already agreed to create a loan, Virgin Money makes it easy to create loan documents, calculate interest and even make and track payments. For as little as $99, you can help avoid the friction that sometimes occurs when friends and family do business with each other.
As the student loan market in the United States continues to be in a state of upheaval, several social lenders have stepped in to help fill the void. People Capital has developed a unique proprietary credit scoring model for students with little or no credit history and is slowing building up its origination volume. Green Note helps arrange and manage student loans amongst a student’s friends and family. It aims to make it easier and less risky for a student to arrange education finance from the people that they already know.
Finally, Kiva is a thriving marketplace that offers a different take on social loans. It aims to help entrepreneurs in the developing world raise small sums of capital that they desperately need to grow their businesses and improve their lives, while also providing a profit to lenders. Kiva utilizes field partners around the globe to identify worthy projects, such as money for a farmer to buy a new plow or a seamstress to purchase a new sewing machine. Kiva facilitates the entire transaction and aims to return a profit to its lenders, though many lenders choose to donate their earnings back into the Kiva community. Kiva is generating substantial loan volume, totaling over $130 million spread across more than 180,000 loans!