Online Loans: All You Need To Know About Social Lending

When people think about online loans, one generally thinks of a loan request done through an online form.

In fact, as well as the web and social networks have influenced both media and marketing with viral effects, so have they been strongly influencing financial products such as loans.

A loan system, that is, a micro-credit one managed with social dynamics is called Social Lending.

Photo Credit: mitarart

If you’re not familiar with social lending yet, here’s what you need to know:

What’s the difference between Social Lending and traditional loans?

On traditional loans, it is the bank that lends you money, on social lendings it is the individuals like you who will lend money to you.

If I’m not granted a loan through the bank, is it likely that I’ll get it from websites like these?

Hardly. Even on online social lendings, the requester’s rating is calculated (the risk for investors who lend you money). If you’re a high risk borrower for a bank, you’ll probably get the same status online.

Do I need to provide guarantees for a loan?

No, or at least, not the way it is requested by banks.

So, there’s a chance I may not restitute my debits? Once there are no guarantees…

Theorically, you might, but consider that you won’t get high sums of money from Social Lending. And not restituting a small sum of money implies the impossibility of reusing this opportunity in the future and for good. Is it worth it?

If it is individuals like me to lend the money, consequently, I myself can do it.

Exactly. In a Social Lending platform, you can register for both loans request and financial investing by lending money to others.

If I wish to lend money but the requester doesn’t need to give any guarantees, what kind of guarantees will I have?

There’s a maximum limit of money you’re allowed to invest, which is subdivided in parts. You can’t lend more than one part to the same person.

To provide a practical example: if you invest 10.000 euros in total, you can’t lend a single person more than 10% of this value. Therefore, you’re compelled to lend 1000 euros to 10 different persons. That limits your risk and avoids speculation.

Consequently, the person requiring the loan will receive it from lots of investors, not only one.

But, what’s the interest rate?

That is perhaps the most interesting point about social lendings: the interest rate is established by whom requires the loan. The requester submits the request specifying the amount, the motivations for the request and the interest rate they are willing to pay.

But, then I can ask for a very low rate!

Yes, but who will be willing to lend you the money? These are the laws of supply and demand. If your rate is too low, no one will offer you money, and you’ll have to submit the request again, raising it. Therefore, as you can see, it is all about the laws of the market, with banks outside.

So…

I hope to have succeeded in explaining the concept of social lending. And beware to the fact that each social lending platform has its own rules, so consider the information on this post as a general guiding.

Here are some peer-to-peer loan platforms:

• Zopa
• Prosper
• Kiva
  Targeted to microcredit for poor countries, based in the USA.
• Virgin Money
• CommunityLend
• LendingClub
• GlobeFunder

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by Dan Di Gregorio | 07 July 2009 | Social network

Tags | finance, kiva, loans, social lending, Social network, zopa