Social Lending and P2P lending have gained a lot of focus lately. I have also written some posts on these before: Micro Lending - Invest for Good and Micro Lending in India.
These two terms are usually used to mean the same thing, but I personally think these two are different and you need to have different focus when you invest in each of these.
For me, Social Lending is when the money you lend goes towards helping people below the poverty line or people who will not get credit the normal way via banks etc. This scenario is mostly found in developing or under-developed countries. That is why most of this kind of lending happens in countries in Africa, Asia or Latin America. Most of the companies that seem to work in this space are non-profit or NGOs. As an investor, I look at this kind of investments as lower interest bearing but good for humanity investments. That does not mean that I give money away for free (for that I would be doing charity), but look at this as investment. I accept a lower monetary return, but see what kind of impact on humanity returns I get. It is still an investments and I carefully weigh the returns, always.
Places where I do Social Lending:
Microplace – USA
Rangde - India
P2P Lending is an alternative lending network. i.e. if you are in need of a personal loan, instead of going to a bank or use a credit card, you go to a P2P lending system. So basically a P2P lending network is a place where investors meet borrowers and the system provides a framework to lend, get returns etc and takes a commission for the service. Most of these sites allow you to invest as little as $25, but since a lot of people invest small amounts, a borrower may be able to get as much as $25K. The interest rates on these loans are based on the credit history of the borrower, anywhere from 9% to 20%. Usually this is lower than the interest rates charged by Credit cards or banks for similar loans. Basically P2P lending provides a win-win scenario. The lender gets an interest rate that is not available to then in any bank and the borrower gets a loan at a rate cheaper than what would be available from a bank.
As an investor in a P2P lending network, I am basically looking at the best return for the amount of risk I take. No charity, just investments in this case. That is the major difference between Social lending and P2P lending in my perspective as an investor.
Note all these loans are basically unsecured loans and if the person taking it does not pay it back or goes bankrupt you loose everything. That is one of the reason why it is a good idea to spread your risk across multiple loans and keep your exposure to each loan low.
There are a number of P2P lending systems in the US. But the one that is currently open to new lenders is Lending Club (US Only). I have been searching, but am unable to find a P2P network in India. There are mentions of GlobeFunder starting an Indian P2P network, but the site has been saying coming soon for 4-5 months now.
Social Lending and P2P lending should be a part of your investment portfolio.
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