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Saturday, October 25, 2008

On a Quest for Social Lending

(Jump right to the list.)
This "global economic crisis" isn't all bad. If you've got some cash piled up, like Warren Buffet--even if it's not quite the $44 billion he started this year with--you're in a great position to be hunting for opportunities while others are just trying to make ends meet as their credit lines shrink. One such opportunity, in my opinion, is something that recently came to my attention: the relatively new movement called "social lending".
The shortest way to explain it is that people borrow money from other people instead of from banks. Why social lending? Consider how banks make money. First, they buy your money by giving you interest on money you deposit with them in the form of savings and checking accounts, MMA's, CD's, or whatever. Then they turn around and sell your money to someone else at a higher rate: by giving a home loan for 6%, a car loan for 7%, a credit card for 13%, etc. (These are just rough guesses at today's rates.) This is what banks do. It's their purpose for existence and how they stay in business. It's called arbitrage. The question on the lips of social lenders is, "Why should the banks have a monopoly on this?" Social lenders want to get in on this action.
Social lending is also known as P2P (peer-to-peer or person-to-person) lending. As described in the wikipedia article linked above, it can refer to a "marketplace" type of lending, where lenders browse for borrowers they would like to lend to, or a "friend/family" type, where you are lending to or borrowing from a friend or family member and would like a service to help make the loan "official" with appropriate legal paperwork. In this post, I'm referring to the "marketplace" type of lending, in which you, as a lender, actively search for someone to lend money to as an investment. The model I'm primarily interested in is one where borrowers list their loans and lenders "bid" on them with a dollar amount they're willing to give and the interest rate they want for it. In essence, it becomes an interest rate "auction", with lenders bidding down the rate until the "auction period" expires.
Social lending allows anybody with a little bit of cash--as little as $50 in some cases (maybe less?)--to lend that cash out, thereby putting the money to work and getting a higher return than they'd get from a typical bank account. Before you get too excited, social lending sites have taken something of a beating in the past couple of weeks. A quick Google search turned up a WSJ blog and a Washington Post article about how these sites have been affected by recent events: tighter regulation by the SEC and higher-than-normal default rates are putting a dent in their business. Briefly, the sites have been forced to suspend all new business until certain SEC filings are complete--a process that can take months. Unfortunately, this is happening just at the moment when their businesses should be growing by leaps and bounds, as more and more loan-seekers are denied by banks and turn elsewhere to get the funding they need.
A word of caution wouldn't be out of order here: when you loan money like a bank, you're taking on risk like a bank. Don't lend indiscriminately or you'll find yourself in the same position as Wachovia:
"October 23, 2008--Wachovia Corp. reported a $23.9-billion third-quarter loss Wednesday, the largest loss at any bank since the financial crisis began..."
Wachovia, of course, won't be Wachovia for much longer. Lehman Brothers is another good example of how not to lend. I can't find any one, good article, but looking over a news search for "Lehman Brothers" for the past month brings up words like "carnage", "fire sale", "disaster", "subpoenaed", "death", and other unpleasant things. When you lend, choose your borrower wisely, and, as with any financial endeavor, diversify! Split your money across many borrowers to limit your exposure to defaults.
One other thing to check for... To loan money, you have to first have the money somewhere. Make sure that whatever service you go with keeps your money in an FDIC-protected account. If it doesn't, well... I won't tell you what to do with your money, but make sure you know exactly what you're getting into, and weigh the risks appropriately.
If all this doomsaying hasn't scared you off, if you're still interested in the potential investment opportunities offered by social lending, as I am, then you can start by looking through this list of social lending sites I've found. Not all of these are "marketplace" lending sites, but I'm listing them anyway so that it's a complete reference. Further, some of these sites serve particular countries exclusively, so make sure you check that particular detail. I've tried to keep at the top of the list all the sites where a US citizen could go and sign up for an account right now to start lending.

The List

Fynanz - http://www.fynanz.com/ - Social lending that specializes in student loans. This one was going to be further down in the middle of the list (arbitrarily), but I moved it to the top because it seems like a really good prospect to me. Take a look around their site. One thing that makes them stand out is that they recentaly gave referral and lending bonuses. It looks like that's over, but it seems promising for the future. They also have a guarantee system that protects some or all of your investment, which I haven't seen elsewhere. Finally, there's the fact that you're investing in someone's education.
LendingClub - http://www.lendingclub.com/ - A high-profile US social lending site. They very recently reopened lending after completing the aforementioned SEC registration process.
Loanio - https://www.loanio.com/ - Another site that is currently open for business to US residents. I'm not sure if they've had to or will have to register with the SEC. This is something to check on before you decide to go with them, since they might have to shut down lending for weeks or months to get the registration done.
Prosper - http://www.prosper.com/ - Probably the most prominent social lending organization serving the United States. As of this writing, they aren't accepting new loans because of the SEC registration process I mentioned above. They began the process on 15 Oct 2008, I belive, and it's unknown when they'll open back up to lenders.
CommunityLend - http://www.communitylend.com/ - A new player on the field: they're not open for business yet. It seems they intend to have a public beta, and you can be notified when it launches by entering an email address on the "I want to Invest" part of their site. Note: This is a Canadian company, and I can't find any information about who is eligible to be a lender. I've emailed them to find out. Another note: Before I even finished this post, the Chief Technology Officer of CommunityLend wrote me back--on a Saturday!--to say that because of financial service regulations, the service will only be available to Canadians. That's unfortunate. Their website looks promising.
Yadyap - http://yadyap.com/ - Another not-quite-launched site, Yadyap will reportedly be the social lending equivalent of payday loans. I don't know much else about it. You can be notified when they launch by entering your email address on their home page.
Zopa - https://us.zopa.com/ - Included here for completeness, Zopa recently stopped doing business in the US. They apparently still have a booming business in the UK and also offer services in Italy and Japan. Maybe they'll come back to the US. Who knows? The seem to have had a different business model than the typical auction of a "marketplace" social lending company.
GlobeFunder - https://www.globefunder.com/ - I'm not sure if this is the same kind of company as Prosper or LendingClub. They're not operational yet, and the site doesn't give a lot of detail about what they're trying to do. It does mention "individual lenders" on their Lenders page, so maybe it will be what I'm looking for.
Fosik Lending - http://www.fosik.com.au/ - An Australian lending site that does both "friends and family" and "marketplace" lending. The "marketplace" portion is currently in beta testing and will reportedly be made a public beta. I'm fairly certain that only Australian citizens are eligible, but it isn't stated on their website. I've sent an email requesting confirmation.
iGrin - https://www.igrin.com.au/ - Another Australian lending site that plainly states it's open only to Australians. It's too bad. It looks like a well-executed website.
"Friends and family" loans only: Virgin Money - http://www.virginmoneyus.com/ - No marketplace here. Their whole thing is about formalizing and managing loans between friends and family members.
LoanBack - http://www.loanback.com/ - About the same as Virgin Money, from what I can tell.
Finally, something a little different: "marketplace" social lending targeted at enterpreneurs in third-world or poverty-stricken areas. "Enterpreneur" here doesn't necessarily mean someone looking for $10,000 to rent some office space and set up shop. It could just as easily be someone looking for $300 to buy some pigs for a farm. That's not intended to be derogatory. I just want you to know what to expect:
Kiva - http://www.kiva.org/ - Just from poking around the websites to write this post, Kiva seems like the leader in this section. They have a polished site and and seem to have a lot of traffic. Kiva appears to be open to lenders from all over the world, US included. They target poor enterpreneurs all over the world, and the result is a strong tendency toward agricultural borrowing.
MyC4 - http://www.myc4.com/ - This site focuses on Africa. Borrowers seem to tend more toward light industry--textiles, light manufacturing, and the like. It's not clear whether US citizens are eligible, but the front page claims that they have investors from 75 countries. All monetary amounts are in euros.
United Prosperity - http://www.unitedprosperity.org/ - This one isn't operational yet, but seems like it will be similar to Kiva.

4 comments:

Colin Henderson said...

Thanks for the mention.

I would characterise the new social lending as eliminating the bureaucracy associated with lending while retaining the security of regulation. Consumers whether borrowers or lenders need to know they are dealing with understandable risks, and the result must be one that is sustainable.

Wiseclerk said...

Hi,

great introduction.
Lot's more on p2p lending (background, interviews, ...) can be found at
P2P-Banking.com

P.S.: North Americans can currently only use MyC4 if they agree that they donate, not lend (regulation reasons)

tim vang said...

Great to get an "outsiders" perspective on the P2P-lending industry.

As Co-founder of www.MYC4.com, I just want to comment on differences we find decisive:

Investors at MYC4 is currently having an average interest rate of 12.8% p.a.

Out of +3,000 loans to African businesses, only 23 have not been able to repay the loan (defaulted).

This said, I fancy ALL initiatives that is tuned-in to make a greater world!!

Janie said...

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