Social Lending

What is Social Lending?

Social lending is a type of borrowing, quite different to the normal loans and credit cards offered by financial institutions. Although it does involve a loan, it is not monitored by a traditional financial institution. It sounds like it could be a loan from someone you know and in a sense it is similar to that.

The loans are usually provided through a company, but they are not a financial one. The company just acts as a mediator between the lender and the borrower. Often, the lender and the borrower might know each other and they use the social lending company to make sure that things are sorted out properly with regards to the repayment terms. Sometimes the lender and borrower just know each other through a social networking site or in some cases they do not know each other.

Often people with a poor credit rating might use this way to borrow, because the main financial institutions will not lend to them. However, as time has gone on, many companies look for less of a credit risk and so those on the credit black list are starting to be excluded from those who can borrow from this sort of company.

The attraction of social lending is usually the interest rate. It tends to be lower than that of the main financial institutions. It is often the case that the borrower gets to choose their lender and so will pick the one that has the best interest rate. For the lender they will often get a better rate of return than if they put their money in a savings account. The lender might decide to spread the risk and lend to several people rather than just one and share the loans with others. Then if one of their loans does not get repaid, they have the others to cover that cost.