Monday, January 25, 2010

Is Social Lending the Right Option for You

Due the recession many Americans now have bad credit due to bankruptcies, foreclosures, repossessions, collection accounts and more. Banks no longer look at those with bad credit as potential customers. For those with bad credit it can sometimes be impossible trying to get approved for a loan or line of credit.

If you have bad credit one option is using social lending or peer to peer lending. Social lenders offer products similar to banks such as: personal loans, real estate loans, business loans, student loans, debt consolidation, etc. Borrowers and lenders conduct business without using a traditional bank.

Lenders make money on loan origination fees instead of interest payments so they constantly need repeat or new users. Loans are based on collateral, credit score and personal liquidity. If you own property and have equity it can serve as your collateral for the loan amount you are requesting. You have to have a minimum credit score on average 620 and up but some companies allow lower credit scores. If you default on the loan you lose your equity or personal liquidity and the default may be reported on your credit report.

There are dozens of companies that offer social lending such as: from Prosper, Zopa, Virgin Money, On Deck Capital, Loan Back, Fynanz and Green Note. Prosper offers loans from $1,000 to $25,000. You will be charged a percentage of the amount borrowed (1% -2%) or $25, whichever is greater, depending on your credit score. A minimum credit score of 520 is required for approval. OnDeck Capital offers small business loans.

Fynanz is offers loans to college students. Students are charged a financing rate and a margin rate. Fynanz charges a 1% annual servicing fee for loans. GreenNote offers student loans that do not require a co-signer and charges a one-time fee which is 2% of the loan amount. LoanBack creates a customized promissory note and payment schedule for loans and fees range from $9.95 to $14.95.

Another type of social lending used in many Africans countries is called a "su su" also known as "sou sou", ROSCA (Rotating Savings and Credit Association) or sociedad. "Su su's" are also used in Caribbean, Hispanic and Asian countries. A su-su is a savings method where a group of people pool an equal amount of money for a specific period time. After that time expires, one person in the group gets all the money. The members continue making equal contributions until everyone gets their turn receiving the full lump sum at least once.

Participants in the "su-su" usually consist of close friends and family members who feel obliged to honor the commitment. There are no transaction fees and no credit check is required.

There is a huge risk that members of the "su su" may renege on their obligation, the banker may collect the money and disappear or a member may receive their hand and disappear.

In the past if you trusted a bank or mortgage company and lost, it can’t hurt to put your trust in social lending.

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