What is Social Lending?
Social lending is a new way to borrow and lend, online, with other people. One person requests a loan, and people who are willing to lend that person money all chip in to loan the person what they need. No banks are involved, only people. Such a transaction, when it occurs without the intercession of a bank (and therefore has the potential to lower fees and interest rates for all parties) is referred to as social lending.
A comprehensive list of providers of social loans, many of which have recently received press attention, such as: Prosper: Personal Loans, LendingClub, Loanio, and Fynanz (who exclusively provides social student loans), is maintained at this website.
Benefits of Social Lending
Social lending presents itself as a convenient means for those with funds to invest to directly allocate their available capital to those who may need it most, as well as to those who they know the best. The resulting synergy, in theory, should serve to reduce the risks of borrower nonpayment, while, at the same time, allowing the “social lenders” to derive some social utility from having lent their money to someone they personally know.
Not all social lending transactions involve people who know one another directly, however, and a “network effect” can come into play wherein a particular borrower can be vouched for by a “friend of a friend”, vastly expanding the social lender pool.
Legality of Social Lending
In both of the above mentioned lending & loan scenarios, the loan (promissory note) which results is known as a “social loan”. This type “social lending” instrument is legally binding and functions very much like any other more usual financial agreement which people might engage in, except, in this case, since the parties may know one another, there is also a “social” aspect.