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I’ve never met Imelda. The mother of three lives in Garcia-Hernandez, Philippines and owns a transportation business with her husband. Together, they own a ‘motorella’; an interesting hybrid between a taxi and a rickshaw which her husband uses to ferry locals around.
She was looking for a loan of 7000 Philippine Pesos (about $175 US dollars) to buy tires, motor oil, and gasoline. Her motivations for seeking this loan should be familiar to any parent:
She hopes to make a good profit out of her business so she can support her children’s needs. Her profit will be for school fees and food for her family. In the future, Imelda hopes to have other businesses so that her children will be able to finish their education.
She posted an advert on Kiva. This Microlending titan has made it easy to lend small sums of money to entrepreneurs in the third world for years now, and can pride itself on being the vehicle which has dragged countless thousands out of poverty.
Chipping in $25, myself and a number of other donors based in the UK and US raised the capital for Imelda’s loan; which was paid back in entirety a few months later.
We’re all familiar with Kiva. This model of low-value, medium interest loans works well, and makes it possible for people who traditionally have been neglected by mainstream finance to obtain credit. However, the public perception of this lending paradigm is one associated mostly with the developing world.
I was surprised to discover that peer to peer lending is also challenging the likes of BarclayCard and CitiBank in their traditional heartlands of the affluent West. There are a number of services on the market right now which allow lenders to provide credit, and for borrowers to gain access to funds without dealing with a bank or credit union. I looked at three of them, and explored how they’re shaking up the finance game.
WikiLoan aims to make the process of lending money from friends and family that bit easier. From each step of the lending process, including advertising your loan on social media, arranging a promissory note, and managing repayments.
It’s important to stress that WikiLoan doesn’t actually offer any cash themselves. The disclaimer on their homepage states that “WikiLoan, Inc. does not lend money or match you with a lender. WikiLoan provides fee-based documents and tools for Lenders and Borrowers to manage the peer-to-peer lending and borrowing process. To find a lender, email some friends for help and invite them to participate on funding your loan request.”
If you signed up for WikiLoan to avoid hitting up friends and family for cash, you’re in the wrong place.
Yet, confusingly, there’s a marketplace of willing lenders all advertising lines of credit, alongside their proposed interest rates and loan terms. This seems utterly contradictory to their earlier statement of not matching you with a lender.
It’s still an interesting concept though. Countless relationships have been soured as a result of deadbeat friends and relatives ditching on debt. This brings this informal lending into a less grey area with a legal framework, with a mechanism to handle repayments.
There are some crucial differences between WikiLoan and formal lending. Firstly, receiving funding requires that you first stump up to the tune of $25. This might be a bit unpalatable for some people. Furthermore, the whole experience feels a bit divorced from the slick experience of most banking websites. SSL encryption isn’t enabled on the entire website, which is troublesome for a website in the financial services.
My suspicion of WikiLoan was heightened when running a Whois query against their domain name. When running a query against the likes of Barclays or CitiBank, you’ll get a registered address for their domain name. This is usually at a business address or an office. Yet WikiLoan have chosen to base their operations from a residential address in Beverly Hills.
This, combined with the slightly cavalier attitude to encrypting traffic on their website and the slight incoherence of the site is enough for me to recommend avoiding WikiLoan.
Lending Club is a San-Francisco based startup which has been connecting lenders and borrowers since 2006. It’s SEC registered, totally above board with all loans being processed by WebBank; an FDIC approved bank based in Utah.
It allows individual lenders to easily provide financial services to people based upon their credit score, usage and history. All loans are unsecured, with interest being calculated upon the expected risk of the borrower.
Perhaps the most compelling advantages of the Lending Club model is that lenders can spread risk by choosing which loans to fulfill and how much they wish to commit to an individual. The entirety of a lender’s capital does not have to be invested in a single person.
This simple model is not too dissimilar to Kiva and is having similar levels of success. Last year almost 120 million dollars were lent in the month of February alone, posing a significant challenge to the homogeny of the traditional lending system.
Reddit seemingly has a community for everything. One which doesn’t get nearly enough recognition is /r/loans, which allows redditors to help other members of the Reddit community in times of need.
There’s even a rudimentary form of credit rating. The appropriately named Credditbot looks at the karma of a user, as well as the previous lending and borrowing activity of a user on the /r/loans subreddit. When someone submits a request for a loan on the subreddit, Credditbot automatically posts these statistics as a comment on the post.
Ramon Chiratheep is a UK-based PR student and journalist who has used /r/loans both as a borrower, and as a lender.
I lent about £100 overall to different people, and yes, I was paid back. Sometimes others aren’t so lucky, but mine were small amounts. Lending these small amounts meant I got to ask for two large loans of £250 and one of £150 because credditbot gave me a good rating.
And yes, I paid those back in full when the time came. Haven’t used it for a while, but it usually helps if you’re quite active on Reddit and on your personal account, as it shows you’re probably unlikely to scarper with all that money considering you’ve spent so long building up delicious, delicious karma.
[/r/loans] … truly are the best of Reddit. When a family friend I’ve known for pretty much all my life refuses to give me a short-term loan because of a bullshit “you never know what might happen next week,” but a stranger online is willing to make that leap of faith because someone’s in need… It just gives me warm fuzzies all around.
Mainstream banking is here to stay. There’s no doubt about that. And I don’t see peer-to-peer lending chipping away at the dominance of the big banks and credit card companies.
But what do you think? Have you used peer-to-peer lending in the past? What are your thoughts on it? Let me know in the comments below.