Social lending sites, also called peer-to-peer or P2P 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 networks that are designed to be streamlined and efficient.
A growing industry
The recent growth of the social lending industry has made it a viable alternative to traditional bank loans or borrowing money from friends or family. A primary reason for the growth of social lending is that borrowers on social lending sites can often find better loan rates than they can find through other borrowing avenues. It is also much easier for individuals to borrow smaller amounts of money. Whether a borrower is saving for college, a vacation or to start a new business, borrowers can shop their loans and start receiving bids the same day.
Social lending sites also have benefits for lenders. Lenders can build portfolios of loans that may offer better rates of return than other investment alternatives. But there is an important difference between P2P loans and keeping money safe in FDIC-insured CDs, money market accounts and savings accounts. Social lending returns can fluctuate wildly and even turn negative. State security regulators have issued warnings to investors on the risks of social lending and have warned investors about sites that might not be legitimate. The increased scrutiny is expected to help to clean up the social lending industry and make information on P2P lending more accessible.
In the beginning, social lending sites faced a number of challenging regulatory hurdles, but those regulatory issues have, for the most part, been resolved. Social lending has grown especially popular in the United Kingdom, where sites such as Zopa, RateSetter, Yes-Secure.com, Quarkle and Funding Circle have competed fiercely to gain loans.
In the United States, the strong investment returns advertised by social lending sites are drawing investor notice. Listed below are some of the more well-known social lending sites.
GreenNote: raising money online for college students
GreenNote provides a great way to raise money online for college tuition costs. The concept is pretty simple. The power of social networking can be effectively leveraged on GreenNote to help make college savings a reality by telling a student's story creatively to donors. The first step for prospective students is to create a social profile on GreenNote that can manage and promote fundraising campaigns for their college costs.
Profiles created on GreenNote can also be used to meet criteria set by foundations, alumni and other organizations looking to make a charitable donation. The GreenNote donor network allows donors to search for specific students. If you have a friend or family member who is looking for a creative way to finance their college education, GreenNote could be a viable option.
Prosper: personal loans and online investing
Prosper launched in 2006 out of downtown San Francisco. By 2011, the site had grown to more than 1 million members and funded more than $234 million in personal loans. On the site, borrowers start by setting the maximum rate of interest they are willing to pay, which then starts an open bidding process that can push down the rate of the loan. All loans are unsecured, three-year, fully amortized personal loans with no hidden fees. Loans can be paid off early with no penalty.
Lenders on Prosper can choose the individual loans that they will fund with a minimum investment of $25 for each loan. Because only a portion of each loan is funded, lenders have the ability to lower their default risk across a portfolio of loans. Prosper publishes the expected annual returns for loans based on historic loan and default rates. Prosper also publishes estimated annual loss rates for each loan grade, a powerful tool to help lenders assess risk and make informed investing decisions. Using the one-year time period from June 2010 to March 2011 as a data set, the expected annual returns for Prosper lenders was 5.7 percent for AA-rated loans, 6.3 percent for A-rated loans and 7.8 percent for B-rated loans. Actual returns can vary widely based on the performance of individual loans.
RateSetter: social lending British-style
RateSetter is a new site from the United Kingdom where you pick your borrowing or lending rate and then just sit back and wait for an approved match. Sounds easier than a bank loan, right? Another useful feature of RateSetter is that borrowers are screened for creditworthiness. Loans completed on RateSetter are paid in 36 equal monthly installments. Lending rates currently range from 4.0 percent to 7.8 percent, while borrowing rates vary from 7 percent to 13.1 percent.
SmartyPig: reaching a savings goal with social networking
SmartyPig combines a high-yield online savings account with a social networking platform that can be used to raise funds for a financial goal. Social networking tools on SmartyPig can be used to encourage friends and family to contribute to a financial goal like a vacation, a wedding or college tuition. When a financial goal is achieved, cash rewards are available from participating retailers and travel companies.
Deposits in SmartyPig accounts are held at BBVA Compass Bank, a FDIC-insured institution. So is SmartyPig truly a social lending site? That depends on whether you consider the contributions made on SmartyPig as loans or donations. But either way, it is a very effective social networking tool that can help savers reach a financial goal.
Lending Club: removing the middle man
Lending Club launched in 2007 to help borrowers find an alternative to traditional bank loans. Investors can also shop for a Lending Club Note with fixed monthly payments on terms of either three years or five years. The theory behind Lending Club is that both borrowers and investors can win by finding better rates without paying a bank their normal loan processing fees. As of 2011, Lending Club has funded more than $212 million in personal loans and has made more than $16 million in interest payments to investors. Lending Club also reported an average net annualized return of 9.65 percent for investors for the period from June 1, 2007 to April 5, 2011 -- a figure that easily beat the major stock-market indexes.
LendingKarma: formalizing personal loans
Lending money to a family member or friend can be tricky. On the one hand, you can eliminate a lot of service fees and secure a better rate when you borrow money from someone you know. Unfortunately, bad feelings can arise if there are late payments or misunderstanding about the terms of the loan. LendingKarma is a site dedicated to formalizing and tracking personal loans to prevent these types of problems. There you can purchase loan packages that track all loan payments, create legally binding documents and provide online payment tracking. A professional loan arrangement, such as those provided by LendingKarma, can help take some of the headaches and heartaches associated with personal loans out of the picture.
People Capital: A fresh approach to financing an education
People Capital provides an 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 applicants that can help lead to major savings for students.