Social Lending

Looking for an investment opportunity? Wave of the future, Dude! Well maybe I wouldn’t go that far, but social lending is catching on because lenders have the ability to make 9%, 12%, 15% or more on their investment.

What is it? Basically, through the medium of a reputable website, you become the bank and lend to your peers. The website does the vetting by means of a detailed credit check, the results of which are available to you the lender. The better the credit score, the better the borrowing rate for the perspective borrower. Those with high credit scores can usually receive a loan for about 8%, while those with abominable credit scores (although they all have to be higher than 660) can borrow at 18%. You, the lender, have the ability to decide which borrower you would like to choose, and for as little as $25, you can fund a loan. Generally, the borrowers are asking for loans from $1,500 to $10,000 or even more, and their loans will be funded by the thousands of people who make up the social lending community. Any given loan is usually funded by at least 50 different people.

If it sounds to good to be true, it probably is! Why do I say this? Because you need to be warned that, just like banks who lend, you are subject to default by the borrower. If you lend $100 bucks to someone with a low credit score hoping to make an 18% return, the chances are very real that you might get burned. On average, 5% of social borrower default on their loans. What this means for you, the lender, is that you need to be careful about who you lend to (tell that to Citigroup, Wells Fargo, WAMU, etc.), and that you also need to diversify your portfolio. Personally, I have been lending socially for two years, and even in this rough economic climate, I haven’t seen one single default in my portfolio, but that means that it won’t happen to me tomorrow.

For the wise lender, it is possible that you can make a 10% return on your investment, which is much higher than your average CD, Money Market or Orange Savings Account, and even most Mutual Funds (but of course, much riskier). It’s also a way to start sticking it to the banks and financial institutions that basically burned our money in a bonfire of excess and over-calculation over the past few years. But most importantly, DO YOUR RESEARCH AND DECIDE WHAT IS RIGHT FOR YOU!

Check out: LendingClub.com, Prosper.com, Zopa.com