For most people, lending their own money to strangers may not be an idea that exactly exudes confidence especially in this day of ongoing credit crisis. But social lending is becoming a more viable option for many, provided one can get over the initial idea of lending or borrowing money from their peers who are also likely strangers.
There are many social lending sites on the internet today and the popularity of those sites as well as new ones is certainly growing. As cash-rich lenders are matched with cash-needy borrowers, an agreement is established and both borrowers and lenders benefit from not having to go through a traditional bank, enabling for better negotiations for all involved.
While the concept of social lending seems to make sense in light of the tightening ropes of the lending industry, most individuals are still worried about the risk and safety of it all. Breaking it down on a personal level, there are still people not entirely comfortable lending even small sums of money to family and friends, let alone complete strangers. The statistics are now coming to light from several social lending companies that are reporting typically low default rates overall. In fact, for some sites the default rate is even lowered than initially expected. The general theme is that reputable social lending companies are just as safe as banks because they require the same processes as bank lenders do, including extensive credit checks and income verification. Social lending sites do indeed turn away a large number of potential borrowers for failing to meet qualifications.
Divide The Risks
Lenders are encouraged to spread the wealth if they are considering lending more than a few hundred dollars. Those giving are encouraged to divide the total funds among several borrowers rather than just one. Lending sites typically cap the amount of loans that are given out to the borrower to further prevent disastrous default and usually promote loans under $15,000. If a default should occur, the social lending sites will pursue the debtor much as a bank would, some even using outsourced collection agencies.
The risks in addition to defaults is that the reality of social lending sites is they are not banks. It is essentially an online marketplace that while regulated by the government, it does not have the same advantages or protections as borrower or lender would get from a bank. Additionally, being a lender on a social lending site is not as cut and dry as would other investments. Portfolios will need to be looked at carefully more often and money that is waiting to be borrowed may be better off somewhere else earning interest.
As with most things, it pays to know before you get involved. If you are thinking about participating in social lending in any capacity, you will need to first be sure you understand the rules. If you are interested in just throwing money away frivolously, then by all means proceed without caution. However, as most of us choose to be extremely careful with our funds, whether borrowing or lending them, it is essential you are well versed not only on the concept of social lending but also about the company from which you are lending or borrowing. Especially now, as social lending sites continue to gain momentum, you have to be cautious about what company you ultimately chose to work with. There are scams and frauds in nearly ever industry on Earth and if you are not prepared to do your due diligence prior to getting involved, you might not be ready to be a social lender or a social borrower. Much of the risk and safety concerns need to be addressed by the participate as blame can only be placed on the company to an extent. It is the obligation of the participate to understand the game before taking the field.
Peter Renton is the chairman and co-founder of LendIt Fintech, the world’s first and largest digital media and events company focused on fintech. Peter has been writing about fintech since 2010 and he is the author and creator of the Fintech One-on-One Podcast, the first and longest-running fintech interview series. Peter has been interviewed by the Wall Street Journal, Bloomberg, The New York Times, CNBC, CNN, Fortune, NPR, Fox Business News, the Financial Times, and dozens of other publications.