About Social Lending

Social lending sites, also called peer to peer lending sites, provide borrowers and lenders a marketplace to cut out the costs and hassles associated with financial intermediaries. Social lending sites connect individual lenders and borrowers through a social network that is streamlined, efficient, legally formatted, profitable, and most importantly - helpful. The growth and maturity of the social lending industry in the last couple of years has made it a viable alternative to traditional bank and personal loans. The primary reason for the growth of social lending is that borrowers on social lending sites can find a better loan rates than they can find through other borrowing avenues. In addition, it is easier for individuals to borrow smaller amounts of money. Social lending sites can also provide fast answers. Whether a borrower is saving for college, a vacation, or to start a new business, borrowers can shop their loans and start receiving bids on the same day. Social lending sites also have benefits for lenders. Lenders can build portfolios of loans which may offer better rates of return than other investment alternatives. Naturally, the loans made on social lending sites are not FDIC-insured and carry risk. However, historical default rates on social lending loans are actually significantly lower than mortgage default rates or credit card default rates. Many social lending sites faced a number of challenging regulatory hurdles in the first few years of operation. Those regulatory issues have, for the most part, been resolved and social lending is now in a growth phase again. MoneyRates.com continues to report on the latest social lending news and sites below:

Prosper: Personal Loans and Online Investing

Prosper has 970,000 members and has passed 200 million dollars in personal loans funded. To borrow money on Prosper, a borrowers must have a credit score of over 640. Borrowers set the maximum rate of interest they are willing to pay, but then an open bidding process can actually push down the rate of the loan below the maximum acceptable rate. All loans are unsecured 3-year fully amortized personal loans with no hidden fees. Loans can be paid off early with no penalty. Lenders on Prosper can invest $25 or more each towards individual loans that they can personally choose online. Because they fund only a portion of each loan, lenders have the ability to lower their default risk across a portfolio of loans. Estimated investment returns on loans range from 7.39% for AA-rated loans to 15.99% for D-rated loans according to the Prosper website, although actual returns can vary widely. Prosper's customer service has received good reviews, although a new loan servicing platform caused some minor disruptions last month.

Virgin Money: Simplifying Loans From Friends and Family

Sir Richard Branson began his music and business empire with a loan from his aunt, so his online loan venture, Virgin Money, is very close to his heart. The Virgin site facilitates and manages loans between relatives and friends. The site provides the flexibility to both borrowers and lenders to negotiate their own loan terms on small business loans, education loans, and tuition financing. Virgin Money provides users a personalized promissory note and online loan setup for a $99 fee. The Virgin Money site also provides useful and helpful tools, payment calculators, and guidance on interest rates and information on applicable federal laws on interest rates.

Lending Club: Peer to Peer Lending

The Lending Club allows borrowers to apply for loans or for investors to open accounts to build a portfolio of loans. The theory is that both borrowers and investors can win by earning better rates without paying a bank their normal loan processing fees. Lending Club has funded over $120 million in personal loans and has made over $8 million in interest payments to investors. Lending Club is reporting an average net annualized return of 9.64% for Lending Club investors for a period covering May 1, 2007 to July 15, 2010. While this historical return compares favorably to rates on certificates of deposit, money market accounts, and savings accounts, it is important to remember social lending returns can vary widely and even be negative. Borrowers on Lending Club can borrow up to $25,000 with an interest rate that currently ranges from 7.93% on A1-rated loans to 25.07% on G5-loans. A rate tool on the site allows you to compare loan rates based on your loan amount, loan purpose, and credit score. Loan origination fees are charged to the borrower on each loan. Investors can buy portions of 36- month or 60-month loan notes for as little as $25. The secure Lending Club website allows quick comparisons of borrowing and lending rates for prospective customers.

GreenNote: Raising Money Online for College Students

GreenNote provides a way to raise money for college online. By creating a social network on GreenNote, a prospective student can manage and promote a complete fundraising campaign. Profiles created on GreenNote can be used to meet criteria set by foundations, alumni, and other organizations looking to make a charitable donation. The power of social networking can be effectively leveraged on GreenNote to make college savings a reality. A new GreenNote donor network is coming soon which will allow donors to find qualified recipients. In addition, a sponsor loan program will allow lenders to make low-cost or no-cost loans to prospective students. If you have a friend or family member looking for a creative way to finance their college education, refer them to MoneyRates.com for the latest information about social lending sites like GreenNote.

People Capital: A Fresh Approach to Education Finance

People Capital provides an online, peer-to-peer (p2p) lending platform on which students are matched with college funding sources. Individual investors, philanthropic/affinity groups or financial institutions can all lend on the People Capital site as long as they are accredited investors as defined under Rule 501 of Regulation D under the Securities Act of 1933. To be eligible to receive a social lending loan on People Capital, a student must be enrolled at least half time and be pursuing a degree at a Title IV-eligible US educational institution. In addition, students must be an +18-year old US citizen with a valid social security number. The People Capital lending platform offers a wide variety of different loan options for qualifying students, which can lead to major savings opportunities for qualifying students.

GlobeFunder: Healthcare Social Lending Alternative

GlobeFunder is a secure, lending platform for healthcare, consumer, and commercial receivables. GlobeFunder's receivable solution, IOUSOS, provides consumers a way to receive a discount on unpaid bills without the hassle of dealing with billing departments and collection agencies. The GlobeFunder site qualifies as a form of social lending because the engine behind GlobeFunder transaction is an online marketplace. GlobeFunder empowers consumers burdened with unpaid medical bills by providing an effective way to negotiate settlements.

CommunityLend: Social Lending in Canada

Social lending is not just a phenomenon in the United States, social lending sites have cropped up in Australia, Japan, and the United Kingdom. One of those sites, CommunityLend, is the first social lending site based out of Canada. CommunityLend offers borrowers an opportunity for lower rates than they might find from commercial banks in Canada. The site provides borrowers with a social network that can fund their loan through auctions and bidding. Competition for loans through the online bidding process can frequently can lower rates for borrowers, yet keep rates of return attractive for investors. Current rates range from 6.00% on AA-rated loans to 20.0% on C-rated loans for borrowers. CommunityLend is available to residents of the Ontario and Quebec provinces.

SmartyPig: Reaching A Savings Goal with Social Networking

SmartyPig is a website that combines a high yielding online savings account with a social networking platform that can be used to raise funds for a financial goal. Customers use social networking tools to encourage friends and family to contribute to a financial goal like a vacation, a wedding, or college tuition. Social networking tools can be used to publicize and promote to friends and family. When a financial goal is achieved, cash rewards are available from participating retailers and travel companies. At the moment SmartyPig accounts are held at West Bank, a FDIC-insured bank based in Iowa, but starting August 1, 2010 all savings accounts will be held at BBVA Compass Bank. The SmartyPig online savings account currently pays a 2.15% APY on all balances. Is SmartyPig truly a social lending site? That is a question for each individual of whether the contributions made on SmartyPig are considered loans or donations?

Last Updated: 7/15/10