Finance Gets Personal with Social Lending

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 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!

  • Peter Renton

    Peter Renton is the chairman and co-founder of Fintech Nexus, the world’s largest digital media company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series.