Entries in Virgin Money (4)

Tuesday
Jul072009

Five things to ask yourself if you are interested in social lending

There is significant buzz around the concept of social lending these days. From the dramatic re-opening and prompt re-closing of Prosper Marketplace, to the calm (and dare I say bank-like?) steady returns of Pertuity Direct, mainstream borrowers and lenders across the spectrum are wondering whether social lending may be a legitimate pursuit. But who is it for? Is it an alternative reliable source of returns for investors? An option for borrowers who seem to have no other options? A platform to lend to the working poor around the globe? A risky, high-payoff avenue for lenders? A way to feel good about helping people reach goals that you support?

The truth is that social lending is an incredible diverse market space. If you’re thinking about entering the social lending sphere, ask yourselves these questions to know which platform may be right for you:

  1. What originally drew you to social lending? I see three main classes of people interested in social lending: 1) Investors looking for an alternative return stream; 2) Idealists looking for a concrete, high-impact way to contribute to social good; and 3) Casual lenders intrigued by the possibility of cutting out the bank to earn returns and create a more transparent financial experience. You should know immediately which type you are—investor, idealist, or casual lender—and your options will narrow considerably based on these goals.
  2. How much personal connection are you looking for? As the term “peer-to-peer lending” has evolved to the broader “social lending”, some sites are moving away from the direct p2p connection. Pertuity Direct, for example, has very consciously tried to move to the mainstream lending market by relegating the typical “borrower profile” to an optional community page. Instead, lenders buy into a pool of borrowers of a given asset class. This approach is excellent from an efficiency standpoint—no need to browse through profiles to try to create your own diversified portfolio—but the lenders looking for the feel-good sensation of getting to know your borrower will be disappointed. Lending Club offers the more traditional profile-browsing approach which gives you a direct connection to your borrowers. On Kiva and Microplace, you choose a microfinance institution who finds individual micro-entrepreneurs according to filters—in your chosen country, target demographic, etc.—whereas on LendforPeace, the entrepreneurs are all Palestinian. Through Virgin Money, you simply formalize deals with people you already know; no new relationships are gained, rather the site creates the framework to help prevent existing relationships from deteriorating when they are complicated by a financial bond. The latest entrant Unithrive connects Harvard alumni with current Harvard students – the possibility for a durable bond between individuals is there with both the financial and university connection.
  3. How much risk are you willing to take? Initial challenges with high default rates when the p2p lending space was in its infancy led to many charges that borrowers on these platforms are an adversely-selected population and lending is risky business. The industry has made great strides since then and has instituted far more stringent borrower requirements, but the risk factor is still relevant. Pertuity Direct and Lending Club are the only two companies that are registered with the SEC, so if the government’s blessing matters to you, your options are quite limited. The international microfinance sites have very low default rates (1.7% on Kiva). Pooled lending, like on Pertuity Direct, achieves the highest rate of diversification, but if you’re willing to accept the risk, you can choose borrowers paying a higher interest rate based upon their profiles at Lending Club. Prosper is still shut down, but many early lenders were burned on the site – often due to their own lack of judgment, but an issue nonetheless.
  4. Do you want to make money? At Kiva and LendforPeace, p2p microfinance sites, you earn no interest, but the sites offer a high-impact way for you to park additional money (as little as $25). At Microplace, you can earn up to 6% interest (although most investments fall more in the 1-3% range). At Pertuity Direct, the average interest rate is around 13.4% (minus fees). Lending Club claims a 9.05% average annual performance.
  5. Are you interested in a particular cause? Many sites target very niche markets. If you are appalled by the usury of payday lending, check out alternative Yadyap (“payday” spelled backwards). Passionate about education financing? Look into People Capital or Unithrive. If you are looking to provide economic opportunities in Palestine, LendforPeace is your site. To help mainstream American families, Prosper and LendingClub are the best known.
Wednesday
Mar112009

Can P2P Lending Help to Loosen the Credit Crunch?

 

Uncrunch America offers consumers a package of tools to help them handle the credit crunchPeer to peer lending sites have undoubtedly had a more prominent role in the context of the financial crisis. Uncrunch America” is a an effort by a group of P2P and social lending sites— namely Lending Club, Virgin Money, and On Deck Capital—to build an awareness campaign that aims to “help resolve the credit crunch and rebuild the economy by delivering consumers with secure, trustworthy tools and infrastructure to finance necessary expenses and make critical investments.”

Along with the three lenders mentioned above, the support team also includes providers of personal finance tools and credit education such as Credit Karma and Geezeo. ChangeWave, a global network of professionals, is also a part of the team and helps to provide marketing and public relations support.

What is this coalition’s secret weapon? By joining powers (read as bundling) they can provide useful and demanded services to the American consumer in this time of need. According to their website, since the start of the year Uncrunch has distributed over $US 74 million (this number represents the amount of money lent via Lending Club, Virgin Money, and On Deck Capital).

There is no doubt that the tightening of credit from traditional lenders has created an opportunity for social and P2P lenders. But are consumers grasping the opportunity presented by untraditional lenders? It seems that lack of borrowers is not the problem. However, two of the three lenders on the Uncrunch team depend on individuals to provide the finance for loans and in today’s worried financial picture it is no surprise that individuals might hold on to their money as tightly as banks. As with any investment, lending through untraditional lenders is a bit of a gamble but most people today have lost their appetite for risk.

Although Uncrunch America provides valuable services for borrowers, questions remain about how it can increase the supply of financing for loans. This is where the real “uncrunching” begins.

Flicker credit: Happy Haggis

 

Wednesday
Mar042009

Friends asking you for money?

Mainstreet today offers good advice to individuals who are finding themselves in the position of would-be lender to friends and family who have fallen upon hard times: Make the loan official. And consider using an official peer-to-peer lending site to facilitate.

The trend of using peer-to-peer platforms for everything from charity to student loans is up: "Virgin Money USA, which administers loans among friends and family members, says the dollar value of loans outstanding has soared to $390 million. That's nearly double from October 2007, when the company launched." As we've profiled, Virgin Money offers a way to formalize loans between people who know each other, managing the transactions and hopefully, reducing some of the relationship strain.

Sunday
Feb082009

Looking to try out P2P Lending?

See the possibilities with our new P2P Lending Primer