October 15, 2007 8:20 AM
Social Lending Online Gains Ground
Social lending, an online lending tool which connects lenders and borrowers on the web is now gaining more popularity among people who needs some quick cash. By eliminating all the hassles involved when applying for a loan from financial institutions, while giving opportunity to those who want their cash to earn a bit more than what one would normally get from a bank, social lending is slowly attracting attention and buzz in the online financial market.
Companies such as Prosper, GlobeFunder and Zopa are taking social lending to a higher level, acting like the way eBay does in facilitating the link between suppliers and buyers. With this companies opening up new avenues for spreading investment, people with extra money are starting to lend to a number of clients through these lending vehicles.
Although social lending, sometimes called as “peer to peer lending,” has been around for a long time where lenders basically operated within the circle of people they know, or, if there are referrals, by word-of-mouth. There was no checking on borrower’s previous credit performance, no collateral or contract agreement, and the client base can be very limited.
The process is very simple for the investors. List of loan applications is made available to the lenders and they choose who they want to lend and for how much. Typically, an investor may spread a $1,000.00 loan to 5 to 10 people. Borrowers with good credit standing are normally charged lower interest than those whose standing are not that good or are new applicants. As such, investors can earn as much as 8-10% and their capital keeps on rolling because they can always lend again whenever payments are made from previous loans.
Although there are no guarantees, and most times there are no contract between lenders and borrowers, borrower profiles are created so that lenders will have basic information about the people they lend their money to. Sometimes background checks are conducted, but it is not a standard process and often not comprehensive. Other strategies to minimize default on payment implemented by Proser is the “Group Dynamics” model where people who want to borrow are group together based on common factor, like alumni of a university or parent associations. It works on the premise that if a person’s credit worthiness is available to people they know, they are less likely to default on payment.
As the social lending idea is still very new in the market, analysts and critics have not much to say as yet. But previous skeptics are now seeing some possibilities. It is a risky endeavor, but, if it succeeds, can redefine the way the lending business runs.
[via]
Leave a comment