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.