Anyone who has ever tried to borrow money from a bank or credit union knows it is never a walk in the park. Social lending (also called “peer-to-peer lending”) is an alternative to borrowing from traditional financial institutions. Rather than applying at the bank, waiting for approval and rationalizing high interest rates, those in need of a loan can turn instead to private investors.
What is Peer-to-Peer Lending?
The purpose of peer-to-peer lending is connecting borrowers with lenders. Those who might have difficulty securing a loan through a financial institution or who are concerned about the interest rates might pursue social lending instead.
There are many variations on the concept, but the framework allows borrowers and lenders to bypass frustrating red tape. They usually collect online through social lending sites and might never meet in person, but they each receive something valuable from the partnership.
The borrower gets the money he or she needs through peer-to-peer lending, often at a lower interest rate than he or she would pay at a bank or credit union. There are also other favorable terms, such as no pre-payment penalties and longer grace periods, depending on the arrangement made at the inception of the loan.
How Does Social Lending Work?
Peer-to-peer lending can be accomplished in a number of ways, though the most popular medium is the Internet. Many Web sites help to connect investors with borrowers, facilitating and protecting transactions between private parties.
Although the social lending systems vary from one Web site to another, the premise is essentially the same. Borrowers who need money for car purchases, medical bills, house down payments and more log on and set up a borrower profile. They describe their financial situation, why they need the loan and how much they want to borrow through peer-to-peer lending.
The lenders in social lending are not banks or credit unions, but regular people who want to help others and make a few dollars on the side. In many cases, they can make more money investing in peer-to-peer lending than with traditional investments, even though the interest rates might be lower than a bank would offer.
The borrower and lending must agree to the terms of the loan. Sometimes, the Web site has a set contract by which both parties must abide, but in other cases the lender and borrower can make their own decisions. Once everything is finalized, the borrower receives his or her loan and will make payments based on the set schedule.
Where Can You Participate in Social Lending?
There are a number of Web sites that facilitate social lending, but it is important to research each one carefully. They all operate based on their own unique model, and one might be more appropriate than another for your circumstances.
Prosper.com, for example, is a popular peer-to-peer lending Web site for those who are most concerned about interest rates. This Web site allows the borrower to determine how much he or she is willing to pay in interest, and lenders bid on loans based on their own criteria.
Another option is LendingClub.com, which has a slightly different model. With this Web site, borrowers create an account and obtain pre-approval for their loans. Once Lending Club has verified their documents, “most loans fund in less than 2 weeks.” This Web site allows you to make loan payments directly from your checking or savings account.
Those interested in social lending should also check out Peer-Lend.com, which offers great comparisons of different services and an easy-to-navigate application process. They also have great tools for anyone who is on the fence about peer-to-peer lending or unsure where to start.
