Social Lending Financial Market

Money-making Finance Trend Between Friends and Family

Dec 11, 2007 Renee Blixt

While the social lending market has been around for a couple of years, it has been getting much more attention lately. Learn about this money-maker.

Myspace, Facebook, and Gather are all examples of online social sites. Earlier this week, CNN acknowledged another closely related concept--“Social Lending.” While this market has been around for a couple of years already, it has been getting much more attention lately.

Definition of Social Lending

Social lending, or peer-to-peer (P2P) lending, is a means by which borrowers and lenders may transact business without traditional intermediaries, such as banks. Approximately 6 million loans between family and friends are made each year, usually for things like home purchases, small business start-ups, and tuition. Borrowers and lenders who do not personally know each other can also connect via the Internet, where an auction-like process is held.

The Newest Financial Intermediaries

Needless to say, this is a challenging sort of marketplace. These loans can be somewhat convoluted, and emerging companies have wasted no time cashing in on managing this nascent financial market. Intermediaries like Prosper, Zopa, and Virgin promise to provide structure to a still chaotic market; they package, document, resell, and manage the loans.

Not only do these intermediaries make promissory notes or record private mortgages, they also handle all payments and tax reporting. Direct debit and deposit accounts are utilized, and the loans are dealt with in a business-like manner.

Benefits to the Borrower

Interest rates are a couple of percentage points lower than they would be at a bank, and loans are more flexible, allowing grace periods and restructuring. A payment plan is preferable, as it is difficult to save for large lump-sum paybacks.

Benefits to the Lender

These regulated loans are income-generating annuities. The lender receives a tax deduction if default occurs. Potentially, lenders earn 6% and up annually, and making a number of small loans greatly increases portfolio diversification.

Typical Fees

Of course, fees vary, but typically, borrowers are charged 1% of the funded loans, and lenders pay about a 0.5% annual loan servicing fee. There is a $99.00 fee to initiate personal loans. Mortgages incur a $700 fee; this fee includes recording of the mortgages so borrowers can take advantages of tax deductions. In addition, there is a $9.00 per payment transaction fee.

The Social Lending Paradigm Shift

Social lending will prove to be a huge financial business. Such newly emerging types of financial relationships may seriously rival more traditional mainstream financial services and prompt a need to re-examine the model of traditional banking. Perhaps this will be one answer to the worldwide mortgage crunch happening right now.

On a more personal note, these types of loans appear to infringe on the family unit. However, it should be pointed out that many dollars can be kept within the family this way.

The Bottom Line

Social lending schemes are in the process of constructing new ways of using and interacting with financial services. Importantly, the re-emergence of social lending as a significant development within the financial sector is a direct response to social trends and a demand for new forms of relationships. Because social lending schemes embrace the social trends that define the 21st century, they are likely to become increasingly important in the future.

More information

Much more information can be found at Business Week’s article, The Ebay of Loans.

The copyright of the article Social Lending Financial Market in Mortgages/Loans is owned by Renee Blixt. Permission to republish Social Lending Financial Market in print or online must be granted by the author in writing.

Finance and Family

What do you think about this article?