The Rise of Social Lending: Definition, Benefits, and Risks

Social lending has experienced significant growth in recent years, with platforms like Zopa and Lending Club leading the charge. This peer-to-peer lending model allows individuals to lend and borrow money directly, cutting out traditional financial intermediaries.

The benefits of social lending are numerous, with lower interest rates for borrowers and higher returns for investors being two of the most significant advantages. By allowing individuals to lend to each other, social lending platforms can offer more favorable terms than traditional banks.

However, social lending also comes with its own set of risks. As seen in the case of Zopa, which was fined $3.3 million by the UK's Financial Conduct Authority for failing to properly assess borrowers' creditworthiness, there is a risk of default and loss for lenders.

P2P lending is a way for individuals to borrow money from a group of people rather than a traditional bank or financial institution. This type of lending has been around since 2005, and it's primarily used by people who have been turned down by conventional lenders.

P2P lending sites allow borrowers to apply for loans online, and lenders can choose which loans to fund. Borrowers need to provide financial information, such as tax forms, bank statements, and pay stubs, to qualify for a loan. The credit score requirement varies, but a score greater than 600 is generally required.

The interest rates for P2P loans can be lower than those offered by traditional banks, especially for borrowers with good credit. However, rates can be higher for those with poor credit. Some P2P sites also charge origination fees, which can range from 1% to 5% of the loan amount.

Here are some popular P2P lending sites and their features:

Overall, P2P lending can be a convenient and accessible way to borrow money, but it's essential to understand the terms and conditions of the loan before applying.

P2P lending, in its present form, dates back to 2005. It primarily provided access to credit for people spurned by conventional financial institutions and for students who wanted to consolidate their loan debts at a more favorable interest rate.

Early on, P2P lending was a lifeline for those struggling to get credit from traditional banks. Many of these individuals were able to secure loans with lower interest rates, making it easier to manage their debt.

In recent years, P2P lending sites have expanded their reach to include consumers who want to pay off their credit card debt at a lower interest rate. Home improvement loans and auto financing are also available at P2P lending sites.

Some P2P sites allow lenders to start with an account balance of as little as $25, making it accessible to a wide range of people. This low barrier to entry has helped to democratize lending and make it more inclusive.

The interest rates for applicants with good credit are often lower than comparable bank rates, while rates for applicants with sketchy credit records may go much higher. This highlights the importance of having a good credit score when applying for a P2P loan.

LendingKarma is a site that helps formalize and track personal loans between friends and family, eliminating service fees and potentially bad feelings that can arise from informal lending agreements.

These types of loans can be used to finance medical bills, automobile purchases, home improvements, and even debt consolidation.

A key feature of LendingKarma is the creation of legally binding documents and online payment tracking, which can help prevent misunderstandings and late payments.

By using LendingKarma, borrowers can secure a better interest rate than what's typically offered by traditional financial institutions.

Here are some benefits of formalizing personal loans:

Social lending offers a convenient and efficient way to access funds, with the entire process from application to receipt of funds taking as little as two or three days.

You can use P2P loans for just about anything, substituting for second mortgages, home equity credit lines, or traditional bank loans.

Applying for a P2P loan won't affect your credit score, and the credit requirements may be less strict than at traditional lending institutions.

With P2P loans, you can enjoy competitive interest rates and fixed monthly payments, providing a clear understanding of your financial obligations.

The concept of typology is crucial in understanding the benefits and risks of various systems and frameworks.

In the context of this article, typology refers to the classification of different systems and frameworks based on their characteristics and features.

A typology can help identify patterns and relationships between seemingly unrelated elements.

For instance, the article highlights the differences between a hierarchical and a network-based system, where a hierarchical system is characterized by a clear chain of command, whereas a network-based system is more decentralized and flexible.

A typology can also help predict how a system will behave under certain conditions.

The article notes that a hierarchical system may be more stable in times of crisis, but less adaptable to changing circumstances.

P2P lending offers a convenient way to apply for loans, with the entire process taking as little as two or three days.

You can apply online without being personally identified, and P2P loans can be used for various purposes, such as substituting for second mortgages or traditional bank loans.

Applying for a P2P loan won't affect your credit score, and the credit requirements may be less strict than at traditional lending institutions.

P2P loans generally offer competitive interest rates and fixed monthly payments.

However, lenders face risks such as borrower defaults, which can be as high as 10% on some platforms.

Investors should also consider the possibility of borrower defaults, and research has shown that defaults are more common in P2P lending than in traditional financial institutions.

The Federal Reserve's index of delinquency rates on all loans at all commercial banks shows that delinquencies have never exceeded 7.5%, highlighting the higher risk in P2P lending.

P2P lending platforms charge fees or commissions to lenders and borrowers, which can include loan origination fees, late fees, and bounced-payment fees.

Investors should carefully review the site's transaction fees before investing in P2P lending.

You can invest in peer-to-peer lending by creating an account on a P2P lending site, such as Funding Circle, Kiva, or LendingClub, and putting some money into it. These platforms let you select the profile of your preferred borrowers, choosing between high risk with potentially high returns or lower risk with more modest returns.

Alternatively, you can invest in P2P lending by buying the stock of a public P2P lending company, such as Funding Circle or LendingClub.

To get started, you'll need to fund your account, which can be done with a minimum investment of $25 for each loan on platforms like Prosper. This allows you to spread your risk across a portfolio of loans and potentially lower your default risk.

Here's a rough idea of what you can expect in terms of returns: on Prosper, the expected annual returns for AA-rated loans were 5.7 percent, A-rated loans were 6.3 percent, and B-rated loans were 7.8 percent, based on historic loan and default rates from June 2010 to March 2011.

Peer to Peer Microfinance is a way to lend money to entrepreneurs in developing countries through online platforms. These platforms allow Western lenders to supply credit to invest in their businesses.

The internet has made it possible to lend to people from far away, without needing to know them personally. Platforms like Zidisha.org empower entrepreneurs in developing countries by providing them with access to credit.

To qualify for a loan, borrowers typically need to complete an online application, providing information such as credit scores, income, and employment history. The platforms use this information to assess the risk of lending to the borrower.

Here are some popular peer-to-peer microfinance platforms:

These platforms often have lower qualification standards than traditional banks, making it easier for people with bad credit to access credit. However, they also carry higher risk, so lenders need to be cautious when investing in these platforms.

Lenders on these platforms can choose the individual loans they want to fund, with a minimum investment of $25 for each loan. This allows them to diversify their portfolio and lower their default risk.

The expected annual returns for loans on these platforms can vary widely, but some platforms report returns as high as 7.8% for AA-rated loans (see Example 2 for more information).

Be honest with yourself and the lender by providing evidence of your creditworthiness. This will help you build trust with the lender and increase your chances of getting the loan.

Lying or being misleading is a big no-no in the online lending community. Word travels fast, and dishonesty can damage your reputation.

Clearly explain how you plan to use the loan proceeds. Avoid vague statements and be specific about what you want to achieve. Lenders want to know that their money will be used wisely.

Proofread your application carefully, making sure to get the grammar and spelling right. A sloppy application can give the impression that you're not taking the process seriously.

Don't be unrealistic about how much you can borrow. Lenders will consider your debt-to-income ratio before approving a loan.

The process of getting a P2P loan is relatively straightforward. Investors create an account on a P2P lending website and deposit money to fund their loans.

Loan applicants post a financial profile and are assigned a risk category, which affects the interest rate they'll have to pay to borrow. This risk category is a crucial factor in determining the interest rate.

The applicant may then receive loan offers from one or more investors and accept one of them. Some applicants even break up their requests into chunks and accept multiple offers.

The P2P loan process is straightforward and efficient. P2P lending websites connect individual borrowers directly to individual lenders, each platform setting its own rates and terms.

To get started, investors open an account on the site and deposit a sum of money to fund their loans. This money is then used to make loan offers to borrowers.

Borrowers post a financial profile and are assigned to a risk category, which affects the interest rate they'll have to pay to borrow. This risk category determines the interest rate they'll receive.

The applicant may then receive loan offers from one or more investors and accept one of them. Some applicants even break up their requests into chunks and accept multiple offers.

The money transfer to the borrower and the monthly loan payments to the lender are handled through the platform. This process can be entirely automated, or lenders and borrowers can choose to haggle.

Some platforms specialize in particular types of borrowers or loans, like Funding Circle, which focuses on small businesses. Others, like Kiva, allow investors to support entrepreneurs and others in the U.S. and around the world.

To apply for a P2P loan, you'll need to complete an online application, which typically requires providing tax forms, recent bank statements, and proof of income. This information is used to check credit scores and qualify borrowers.

Lenders use the application to determine interest rates, which vary based on credit scores. A credit score greater than 600 is generally required, and the better your score, the more favorable the loan term should be.

You'll also need to provide identification, such as a government-issued photo ID and utility bills. This is a standard requirement for most P2P lending platforms.

Late payments can be costly, with some sites charging $15 or more when payments are more than 15 days overdue. It's essential to make timely payments to avoid these extra fees.

Here's a list of the documents you may need to provide for a P2P loan application:

By following these steps and providing the necessary documents, you'll be well on your way to applying for a P2P loan and accessing the funds you need.

Social lending platforms often operate across state lines, but they're not available everywhere. Lending Club loans, for instance, aren't available in Iowa and Idaho.

While options are available in most states, some platforms have restrictions. Prosper loans, for example, can't be made to residents in Iowa, Maine, and North Dakota.

If you're considering social lending, be sure to check the website of the platform you're interested in for details on their availability in your state.

State Restrictions can be a bit tricky, but they're essential to know when considering peer-to-peer lending.

Lending Club loans aren't available in Iowa and Idaho, so if you live in either of those states, you won't be able to use this platform.

Prosper loans can't be made to residents in Iowa, Maine, and North Dakota, which means you won't be able to borrow or lend through this platform if you live in one of these states.

It's worth noting that options are available in all states except Iowa, so if you live elsewhere, you should be able to find a suitable platform.

Big financial firms dominate lending on P2P platforms, with over 80 percent of loans issued by Prosper going to institutional lenders in March.

This shift has led to a change in the industry's dynamics, with institutional investors now driving growth and competition among investors.

P2P sites are attracting Wall Street's biggest names as board members and investors, and investment banks are vying to manage Lending Club's initial public offering.

The influx of institutional money has allowed P2P platforms to extend more loans to borrowers, with Lending Club estimating that it has saved borrowers $250 million in interest charges.

However, this growth has also created a new set of challenges, including fierce competition among investors to snatch the best loans first.

Original P2P investors, such as dentists and stay-at-home moms, are finding themselves outgunned by the cash-rich, algorithm-wielding arrivistes.