Entries in yadyap (2)


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.

Yadyap hopes to offer a p2p alternative to payday loan market

There are more payday lending stores (22,000) in the United States than there are McDonald’s locations (12,804).[1] A typical payday loan, or the euphemistic “cash advance,” will charge $15 to $30 on a 2-week $100 loan, for an effective APR of 390% to 780%.

The payday lending industry claims that these rates are not predatory because they are still better than any of the other options for short term, small loans. For example if someone is down $100, bouncing a check would cost ~$48, a credit card late fee would cost ~$30, and a late/re-connect fee for utilities would cost ~$50.

I don't buy most of the arguments of the payday lending industry, notable for their strong-arm and misleading lobbying tactics, but the truth is that there are not many alternatives for individuals who live paycheck-to-paycheck and feel forced to turn to a check cashing shop for immediate needs.  I'm happy to see that peer-to-peer lending may be able to change that.

Yadyap is a p2p lending platform focusing exclusively on the payday loan business. They haven't launched yet, but you can follow their news here. I'm slightly wary of lending myself given the poor credit scores of their target borrower demographic, but with a decent track record of low default rates, I could be on board. Here is a sneak peak of their operating model:

"At YadYap borrowers receive instant loan approvals, funds quickly deposited to their bank account, and lending rates that are determined by the free market through a competitive auction. Additionally, YadYap tracks each borrower’s performance and shares these scores with lenders. Good performance is rewarded with lower interest rates and loan fees as more lenders compete to fund their loans."

[1] Brook, Daniel. “Usury Country.” Harpers Magazine. April 2009.

Flickr Credit: Orin Optiglot