Social lending is a relatively new financial tool that may prove to be revolutionary for small business and private borrowers.
Using the power of the crowd to create credit
Also known as peer to peer lenders, social lenders bring together borrowers and lenders via online marketplaces. Matching those with cash to lend, and those who need it, social lenders eliminate the middle man who, in retail finance, tends to be a high street bank. Because of their streamlined structure, P2P lending firms also tend to offer lower interest rates for borrowers and higher returns for lenders, which seems like a win-win situation for individuals all round. Surely, given the maths, and the appetite of consumers for cheap credit (as well as hefty returns for lenders), social lenders will pose a grave threat to big name banks? Who knows, they may even force conventional banks to pay more attention to their long suffering customers. There is no question that banks need some vigorous competition to rejuvenate their relationship with clients. Long queues, poor rates, IT failures, miserly loans, baffling bureaucracy and – of course – the memory of PPI – all means that customers are primed to turn to alternatives.
Social lending offers low rate loans and a new route to invest
Social lenders are gaining in reputation and reliability all the time. Like a normal bank, online social lenders have a core staff who carry out credit checks and administer the business. They ensure that clients can repay the loans made by other clients, and keep the infrastructure ticking over. However, unlike a normal bank, everything is carried out online. Lenders can deposit their money and see it being loaned out within days.
Borrowers can secure funds almost instantly in the form of low rate loans. Social lenders are also well capitalised by now. Lending Works, for example provides insurance against borrowers defaults and fraud – reducing the risk attached to investing.
Peer to peer lending has come along at a fortunate time. While interest rates are low, it remains hard to secure credit when required. So, social lenders have filled the gap. Relendex is a great example, which links up borrowers and lenders in the property market. Lenders can make their own decisions or let an auto-loan system do it for them. This flexibility is characteristic of social lenders, which takes control away from the banks, handing it to everyday consumers. This appears to work for savers who are exasperated by bank rates, and borrowers looking for lower interest rates at the same time. It has risks attached, as all lending does, but it is a growing trend in personal finance that cannot be ignored.
Although it remains a niche market, P2P lending is expanding all the time. With many sites now known for trust and reliability, ease of use and flexibility, more people will be attracted out of bank receptions and into the world of peer to peer lending. For us bank customers, this competition may well make the banks sit up and take notice as well.