In the age of social networking and social media, it’s little surprise that social finance would follow. The ABC’s The Checkout, recently ran a segment about peer-to-peer lending. It’s a new concept in Australia, but it’s already working in some other countries. I want to take this opportunity to explain how it works.
Peer-to-peer lending, also known as P2P lending, social lending and crowd funding, involves connecting borrowers with investors. The process is coordinated by a peer-to-peer lending company that screens borrowers and spreads the risk between a group of investors. For example, Jane Smith’s loan of $1,000 might be distributed between 10 investors who contribute $100 each.
Peer-to-peer lending companies say that the benefits are two-fold: Low overheads allow them to keep costs down for borrowers while delivering good returns for investors. Most peer-to-peer lenders approve only borrowers with good credit histories, which is how they deliver predictable returns to their investors.
Peer-to-peer lending is expected to take off in the coming years and you can bet that traditional financial institutions will be watching closely. The banks have had a stranglehold on loans and social lending is likely to make them sit up and take notice. Right now, SocietyOne is the only fully-compliant peer-to-peer lender in Australia.
Social finance is an exciting development and I like the fact that it gives consumers another option. But nothing changes the fact that a loan is a loan. Peer-to-peer lending has all the same commitments and responsibilities as traditional lending. The best strategy is to save for the things you need!