Making A Profit On Investment From Social Lending Sites
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The worldwide lending industry is a multi-billion dollar industry where
people borrow from banks, financial institutions and other private lenders. In
the last couple of years, the lending industry has gone through an evolution and
has given way to social lending as the new and promising mode of lending. Also
known as peer- to- peer lending or person to person (P2P) lending, one of the
first companies to set the base for social lending are Zopa, Prosper and more
Zopa is considered the first social lending marketplace in the world and its
roots are in the United Kingdom. With the launch and immediate success of Zopa,
other similar peer to peer lenders have sprung up like Prosper in the US, Boober
in Netherlands and Smava in Germany.
If you are wondering whether the P2P loans offered at the social lending
sites are worth it or not then the answer is most likely yes. There is not much
of a difference as far as the P2P loans from these lending hubs and from a bank
is concerned. The difference lies in the fact that there are no banks, no long
procedures, and no middleman and above all the entire process is transparent for
both the lenders and borrowers (no more hidden hard to find loan agreements!).
The main objective of the social lending hubs is to offer an online loan with
the best interest rates and to make customers feel like they are borrowing from
a friend or community. This peer to peer borrowing is increasingly being seen in
a new light and is being considered as a part of community borrowing (which was
more traditionally offered by small local community banks).
? Creation of a new asset class: Lenders on any of the peer to peer lending
hubs can now take advantage of a new asset class, which they can add to their
portfolio because it doesn’t fall under an investment or even a savings account.
? Choosing interest rates and loan repayment: There are several benefits for
lenders as well as borrowers. In social lending hubs like Zopa or Prosper,
lenders have the freedom and the flexibility to choose a loan repayment time
period as well as the interest rate on the p2p loan.
? Active community participation: one of the salient points is that this kind
of a lending hub make borrowers feel as if they are following from an actual
person and not an organization or a faceless institution. Hence it helps in
developing a strong community feeling.
Lenders at any of the social lending websites have the power to set a minimum
interest rate that they want to earn and can bid in an increment of $50 till
$25,000 through loan listings. Borrowers can create a loan listing for a period
of 3-years, and borrow an amortized and unsecured loan of up to $25,000 and also
provide the maximum interest rate that they will be able to pay a lender.
The success of Zopa lies in its facts and figures. They are the largest
lender today and have loaned out in excess of $930,000. The return on investment
for lenders has been around 5.01%, which is healthy especially in the wake of
the fact that social lending is still in its nascent stages. One of the top
lenders even got an ROI of 19.8% on social lending websites.
By now you are probably thinking who these lenders really are? Are they banks
in disguise or are they really other people? The truth is that they are really
people. Let’s take Zopa and Prosper for example. Both the social lending hubs
are backed by Benchmark Capital who also funded eBay. Zopa or Prosper are the
best alternatives that anyone can have to banks or other financial lending
institutions, however they are restricted to the UK and US markets.
The current business model of Zopa is based on a 1% exchange fee that
borrowers are paying them upfront. In return, Zopa is offering borrowers a
better interest rate by cutting out the bank middleman. More than that, a
borrower will have more control of the entire lending process and has the
flexibility to establish an interest rate.
Zopa is the acronym for Zone of Possible Agreement, and its lenders include
only U.K. residents who are over 18 years of age. To qualify as a lender, a
person needs to have a valid bank account and a high personal Equifax credit
rating. There are two restrictions for becoming a lender and they are:
• Lenders have to be individuals and not businesses.
• Lenders will not be allowed to have anything in excess of £25,000 ($47,000)
in outstanding loans at a given point in time.
The American counterpart of Zopa is Prosper and they also handle maximum loan
of $25,000 at a time. At this point the future of social lending looks bright as
it has now hit New Zealand and Australia with the first peer to peer lending hub
in Australia to launch shortly being Lending Hub (you can see their site at
lendinghub.com.au and their active blog at blog.lendinghub.com.au) which will
offer P2P loans with a strong community focus to ensure a truly social
experience for both borrowers and lenders rather than just being a transactional
online loan tool.
About the Author
Ivan Mantelli is an accomplished writer and is also the CEO of Lending Hub,
which is the new social lending platform in Australia. You can find more details
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Article Published/Sorted/Amended on Scopulus 2008-02-09 21:51:54 in Business Articles