What is Social Lending?
Social lending, often referred to as peer-to-peer (P2P) lending, is a financial practice where individuals can lend or borrow money directly from each other through online platforms. Unlike traditional lending, which involves a financial institution such as a bank, social lending utilizes technology to connect borrowers and lenders, facilitating transactions directly between the two parties. This method of lending is typically facilitated through specialized P2P lending websites.
Examples of Social Lending
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Prosper: One of the first P2P lending platforms in the United States, Prosper allows individuals to invest in loans to other individuals, offering a wide range of investment opportunities and lending options.
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LendingClub: Another leading P2P lending platform, LendingClub enables individuals to provide personal loans, business loans, and refinancing options. The platform manages the application process, loan servicing, and collections.
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Zopa: Based in the UK, Zopa was one of the first companies to adopt the P2P lending model. It provides personal loans and investment opportunities, connecting borrowers with a wide pool of lenders.
Frequently Asked Questions about Social Lending
Q1: How does social lending work? A1: Social lending works by using online platforms that match borrowers with individual lenders. Borrowers apply for loans, and if approved, their loan is listed on the website where individuals can choose to invest in funding the loan. Once the loan is fully funded, the borrower repays it with interest over a predetermined period.
Q2: What are the risks associated with social lending? A2: Risks include the potential for borrower default, lack of liquidity (as funds may be tied up in loans for several years), and platform risk if the P2P platform faces financial difficulties.
Q3: How are interest rates determined in social lending? A3: Interest rates can be set by the platform based on the borrower’s credit profile, the loan amount, and the purpose of the loan. In some cases, rates may be determined through an auction process where lenders bid to fund parts of the loan.
Q4: Do borrowers need good credit to obtain a social lending loan? A4: Borrower requirements vary by platform. Some platforms cater to borrowers with excellent credit, while others may serve those with lower credit scores, albeit often at higher interest rates.
Q5: Are social lending platforms regulated? A5: Yes, social lending platforms are subject to regulatory oversight, but the specific regulations may vary by country and state. In the U.S., for example, P2P lending platforms must register with the Securities and Exchange Commission (SEC) and comply with state lending laws.
Related Terms with Definitions
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Peer-to-Peer Lending: A form of social lending where individuals lend to and borrow from each other through online platforms without involving traditional financial institutions.
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Crowdfunding: A method of raising funds from a large number of people, typically via the internet, which can include donation-based, reward-based, equity-based, and debt-based models.
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Fintech: Short for financial technology, it refers to technology and innovation that aims to compete with traditional financial methods in the delivery of financial services.
Online References
Suggested Books for Further Studies
- “The Crowdfunding Handbook: Raise Money for Your Small Business or Start-Up with Equity Funding Portals” by Cliff Ennico
- “Peer-to-Peer Lending and Equity Crowdfunding: A Guide to the New Capital Markets for Job Creators, Investors, and Entrepreneurs” by Donald Z. Darrow
- “FinTech Innovation: From Robo-Advisors to Goal Based Investing and Gamification” by Paolo Sironi
Accounting Basics: “Social Lending” Fundamentals Quiz
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