Social Lending - A winning concept (or is it?)

OK, here's my opinion about the collision of lending and social networking (oh, and all facilitated via the net).  First of all, a little level setting here:  Lending or borrowing money (or monetary equivalent) has been happening since we've had a society.  We've borrowed from strangers, from friends, from family (or loaned to).  In many cultures, the unofficial lending/borrowing network has worked for centuries.  So, doing this on the internet is not a "new" idea - once again, most of the great internet ideas are just applying technology to things that work in the real world - and have worked for centuries (think eBay or Amazon or even Google).

Now, there are many sites that provide this service - and differ in HOW they implement their service, but in general it's about either borrowing money or lending money - the backend company manages the transaction.  Now there are two primary methods....

Borrowing/Lending from people you don't know:  This process is really not all that much different from a bank process.  You (as a borrower) are still judged on your past performance with regard to your credit rating or score.  Interest rates are based upon your past experience with loans - and information provided by credit reporting bureaus.  If you're lending money - you decided how much you'll lend someone (a loan request) and at what interest rate.  Then you get your money back over time at the agreed upon interest rate.

Borrowing/Lending from people you know:  This process is like going to your parents (or friends) for money.  The difference is that there is a back end company to manage the process of repayment.  This one really works pretty good - in many cases, the interest rate is based upon your relationship with the person, not your credit score or rating from the bureaus.  This can save you lots of cash during the life of a loan.  And the flip side, if a family member has money in a low interest bearing account, they can double or triple the amount of many they are making - and still provide funds at a very low interest rate.

Those are really the two models working today - now there is a third one out there - Borrowing/Lending from yourself:  This one is available to many people with 401K retirement accounts.  It's really simple, you borrow money from your 401K at a set interest and usually up to five years.  You pay it back month-to-month.  In some cases, if you're going to buy a car or send your child to college, you can pay less in interest (and you paying yourself).  Now, this one is risky and should considered along with other options - and anytime you're doing this, talk to a tax professional to figure out the ramifications.  But, if you're making 6% from your money and you can borrow the same money and make 8.5%, then it's worth a look.

So, what do I really think?  My problem with the theory of Social Lending is not the concept of borrowing - it's the concept of using the same old tools to evaluate the "credit worthiness" of the person borrowing the money.  Hey, if banks are impersonal, have you ever dealt with a credit reporting bureau?  So, if banks are "evil and bad" and we need a new lending outlet - then why use the same evaluation criteria the banks use?  Don't just change one part of the process (which may be damaged, but actually works) and not fix the real problem - credit reporting bureaus and the credit reporting/ratings industry.

Now, if you are looking to lend money - consider these as part of your potential portfolio.  There are people that talk about risk - I say all investments are risky.  How about all those people that worked for Enron or had money in the stock market when the internet bubble burst?  So, if you invest in stocks, you are putting your money at risk - the stock market is just like Vegas.  It's gambling, pure and simple.  So risk is risk.  If you want safety - buy bonds and Tbills.

In conclusion - this is here to stay.  There will be many banks get into this game, they just take longer to adopt concepts, but be assured, they'll do it.  And what I would say, is enjoy the experience - of either borrowing or lending - we all live in this great big world and we all win when everyone is doing better.

Here's a list of places to find more information....

1 comment:

  1. Arnie:

    What an interesting write up. I enjoyed reading it this morning.

    We at Lending Club are following a "mixed" approach, where you don't necessarily know the person, but we expose other social information such as education, work, associations and location, without exposing any personal information, so that Lenders can utilize their "connections" to make a credit decision, in addition to the hard credit numbers.

    Please feel free to pass this URL to your readers and friends.

    I will personally deposit $25 to your readers for signing-up and trying it out as either a Lender or Borrower.

    Better Rates. Together.

    Rob Garcia
    Director, Web Production
    Lending Club


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