Peer-to-Peer Lending – Social Lending – P2P Loans – microfinancing – all part of the Web 2.0 trend of adding “social” to any activity and creating something new. Instead of going to a bank for a loan, a borrower works with a group of her peers to finance the loan. The social aspect leverages friendships and relationships between people to help fund loans that may never have gotten past the application form at a bank. The lender has an advantage also, as she can spread her risk across multiple loans – if one person stops paying, the remaining loans in her portfolio continue to perform.
Don’t let the work “social” fool you into thinking “socialism.” P2P financing is the furthest thing from socialism. Social lending is market based (well, depending on the P2P lending company you use):
- Lenders “bid” on the right to fund a loan
- Lenders select the loans they bid on by researching the fundamentals behind the loan
- The interest rates of the loans are driven by the market forces – not a “central planning” committee
I would venture to say that Social Finance is even less “socialist” than your average American bank. A bank gathers up investor’s money paying only 2-3% interest, determines the “best” loans to fund at much higher rates, and the difference between the two rates is the bank’s revenue. I am not anti-bank and they are part of the free markets, but they effectively control each side of the transaction – within reason depending on what the rest of the banks are doing. If they fall too far outside the range of reasonable rates, they will either loss all their business to other banks because they are not competitive or they will go broke losing money on all transactions.
Banks create friction.
P2P lending removes friction.
Social Finance makes for a more efficient borrowing and lending market. Market forces are allowed more freedom and are not constrained by a bank acting as a gatekeeper. A lender might get 8% on his investment instead of 3%. A borrower might get a loan for 12% instead of 30% using her credit cards.
As an example, here my listing for a loan on Prosper.com:
$25 Bonus For New Lenders
How to Use Prosper Listing Widget for MySpace, Blog, Website, or Other
Prosper.com is the closest thing to a free market in the P2P lending space. You control the rate you want to place on you loan listing, but obviously you might not get funded if you try to get a rate like 5%. The market will pass you by and your loan will not be funded. Setup a loan with a competitive rate, then market forces will move lenders to research you loan and potentially bid on it. If the rate you select is even better (for lenders) than the rest of the loans on the market, then lenders will compete to get a piece of the action and actually bid your interest rate down.
If you sign up for a new account with Prosper as a lender, you can get a $25 bonus when you lend money for the first time. Don’t be shy about lending some money to my listing!
If you are looking to borrow some money at a lower rate than you can at most banks, try Prosper: