Social lending sites, also known as peer to peer lending websites, serve as social network-based lending marketplaces where anyone can become a borrower or a lender. Generally, the social lending website applies a small service fee that constitutes a couple of percentage points of the total loan amount. Borrowers are able to secure loans at lower interest rates compared to traditional banks because lenders compete to actively bid down the interest rate their willing to earn through funding a given loan. In return, the lender obtains a nice return on investment (ROI) that scales with the amount risk associated with a specific loan. Most loans are funded by hundreds to thousands of lenders whom contribute less than $100 each.
Social lending sites can be particularly helpful for high-risk borrowers that are unable to secure loans from traditional banking institutions. P2P lending sites are also commonly used to consolidate debt from high interest credit cards. Lenders can earn more money by funding high-risk loans but the risk of default is much greater as well. Lenders can reduce their risk by lending smaller amounts, funding multiple loans, and by reviewing a borrower’s lending profile carefully. The borrower’s personal information is kept completely private and the lenders can only view the potential borrower’s credit profile report that displays such things like credit score, past delinquencies, the number of public records on the borrower’s credit report, any revolving credit balance, the total number of credit lines, his/her initial credit line date, home ownership, employment status, debt-to-income ratio, stated income, and occupation.
Prosper – Launched in 2005, Prosper is the leading social lending site in the U.S. with over over 970,000 members and $200,000,000 in funded loans. All the loans funded on Prosper are unsecured 3-year personal loans. Borrowers can pay back their loans early with no penalty fees but he/she must have a minimum credit score of 640 before they can create a loan listing. During the loan listing creation process, the borrower assigns the maximum interest rate he/she wants to pay and provides relevant information regarding the need for the loan and his/her ability to pay it off. Once the loan listing is completed, Prosper lenders can submit a minimum funding amount of $25 or more towards it. Lenders on Prosper can search and select loans to invest in based on various loan categories, Prosper loan ratings, and credit data collected from the borrowers. Besides choosing loans individually, lenders can select from Prosper’s Automated Plans that vary based on the average amount of default risk and bid yield or they can create their own custom plans that automatically fund loans which meet specified criteria. In addition, lenders can buy and sell loan notes through Prosper’s Trading Platform that’s operated by Folio Investing. Prosper.com rates loan risk by assigning a grade to each loan listing that ranges from AA (lowest risk) to HR (highest risk). AA-rated loans generate an estimated return of 7.39% while high-risk loans with a grade of E average an estimated return of 16.93%.
Lending Club – This social lending site was launched in 2006 and it has helped fund over $132 million in loans since its inception. Lending Club’s approach to social lending is much more conservative as it pre-screens and rejects over 90% of all borrower applicants. Lending Club members can apply for home improvement loans, business loans, car loans, special event loans, green loans, loans to pay off credit cards, debt consolidation loans, and other personal loans. Once a borrower is accepted, Lending Club provides several loan options that he/she can select from and the loan is listed until it’s fully funded. All loans are unsecured, non-FDIC insured 3 or 5-year personal loans that are funded by multiple interested lenders that contribute a minimum of $25 or more. Borrowers can get loans up to $25,000 with current interest rates ranging from 6.39% (A1) to 25.07% (G5), depending on the assigned listing grade for the loan. Lending Club charges the borrower an origination fee between 2.25% (A) and 4.50% (G) and passes the rest of the earnings on to the lender. Lenders can also buy or sell lending notes through Lending Club’s Note Trading Platform operated by FOLIOfn.
Virgin Money – A social lending website that acts as an intermediary between a borrower and a lender. For example, let’s say your friend asks to borrow a large sum of money from you and you want to help but you also want something on paper to help ensure that he pays you back. That’s where Virgin Money comes in. They provide the paperwork, legal documentation, and payment handling services for a $99 fee and the borrower and lender collectively decide what the loan amount, interest rate, and payment schedule will be. Virgin Money also offers helpful tools, tips, and payment calculators to assist both parties in making important decisions related to the loan.
Kiva – A non-profit social micro-lending website whose goal is to help alleviate poverty throughout the world by enabling aspiring entrepreneurs secure funding for their small businesses. It primarily operates outside the United States partnering with other microfinance entities that identify, screen, and gather information about an prospective entrepreneurial lender. From there, volunteers create and translate loan listings and post them to Kiva. Lenders can search and select the loans and either fund them completely or partially with a minimum amount of $25. Since its creation in 2005, Kiva has helped fund over $147 million in total loans across 200 countries. An average micro-loan that’s funded through Kiva is only $387.23.
GreenNote – A niche social lending site that focuses on helping students find funding for school. A student in need of school loans is able to create a unique profile on GreenNote and invite lenders to fund their educational loans. The interest rates of these loans are competitive with the federal Stafford loans and once the loan fully funded, the money is sent directly to the school to ensure that it’s only used for educational expenses. Terms of the GreenNote loans are similar to other common student loans where the individual must begin repaying their debt within six months of leaving withdrawing from school or graduating. Students can borrow as little as one thousand dollars or as much as $50k minus GreenNote’s servicing fee of 2% of the total loan amount.If you liked this article, please take this time to share it with your Facebook friends using the Facebook button (see Facebook post button to the left) or retweet it using Twitter (see retweet button to the left). You may also want to follow us or subscribe to the site to stay up-to-date with this article. If you'd rather follow us from your Facebook account, join our Facebook fan page or subscribe to our NetworkedBlogs profile.
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