The Pros and Cons of Social Lending

Photo: quaziefoto

(This story was originally published by Mint.com on Wed, January 6, 2010.)

By Ana Gonzalez Ribeiro

With faith in banks and credit card companies on the decline, more consumers are turning to social lending as an alternative to existing financial institutions for their borrowing needs. The worst offenders, credit card companies, have been lowering credit limits and increasing penalty fees and interest rates on even their most loyal customers. For this reason, frustrated credit card holders comprise one of the largest sectors looking into lending sites to refinance credit card debt. With interest rates as low as 7.8% at some social lending sites, 10% to 15% less than credit card companies and banks, consumers are giving this option a hard look.

One reason lending communities can offer such low interest rates, is because they operate only online. The higher overhead and operating costs associated with brick and mortar facilities are not there. These savings are then transferred to both lenders and borrowers in the form of lower service fees and higher returns.

Lending Club, one of the most popular person-to-person (P2P) lending sites, facilitates the selling of loans in the form of unsecured notes registered with the Securities Exchange Commission. The loans can be used for funding many of life’s necessities such as a baby on the way, buying a car, purchasing a home, paying off student loans or to cover medical bills. The site has become increasingly popular since 2007, mostly due to both the lending options it offers borrowers with various credit backgrounds and the investing opportunities it offers lenders.

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