For many years, credit card issuers have been actively seeking new borrowers and urged old borrowers to charge more. Mailboxes across the country are filled with new offers, introducing rates and rewards for taking them out of their wallets and putting them into use.
Each issuer attempts to surpass each other with a lower balance transfer rate and a higher credit limit. Then, as the financial crisis rises, those card issuers are beginning to face increasing losses.
In the past few months, major credit card issuers have withdrawn new credit cards, lowered credit lines, raised interest rates, and closed accounts—even for the most reputable borrowers.
Now, a new type of lender has emerged to get involved in areas where credit card companies are afraid to get involved. This new breed is called a social lender. This is a peer-to-peer loan, and the lender can usually choose who uses his or her money.
For example, a lender working through Kiva.org may choose to lend $500 to a startup entrepreneur to purchase equipment. Since 2005, Kiva members have provided more than $58 million in loans to more than 83,000 entrepreneurs. In the past few years, most people have been in developing countries, but now Kiva is also lending in the United States.
Pertuity Direct is the newest participant in social lending. Investors deposit their funds in mutual funds operated by the National Retail Bank. Borrowers seeking to use these funds can apply for fixed rate, fixed-payment loans through the website – usually within 1-3 years. The minimum credit requirement is 660 and the interest rate is as low as 9.6%. Approval is almost instantaneous and funds can be in the hands of the borrower. Let go in 1 or 2 days.
Some social lending sites accept lenders who want to invest only $20 – almost everyone has an investment opportunity.
Some social loans are modeled directly on sites like Facebook and eBay. For example, Prosper lists various loan requests from debt consolidation to moving expenses. Lenders can then choose the loans they wish to offer and bid on them at the rates and terms they are willing to accept.
Lending Club is closer to the social network model – allowing its borrowers to find potential lenders based on their location, their "network" or "friend" status.
Now, social loans have also extended to student loans, initially being excluded due to short repayment periods. The lender does recommend that students first apply for a federal loan and use a private lender as a backup option.
Several companies are involved, but the main competitors in the student loan are GreenNote, Zopa and Fynanz.
GreenNote relies on the same social network as Facebook – loans are traded between "friends."
Zopa follows the CD model and relies heavily on partnerships with credit unions.
Although Fynaz does set a minimum FICO minimum score for the borrower, it relies more on the Fynanz Academic Credit Score, which scores the student's GPA, his or her study program, and the educational institution's profile.
The online banking report predicts that this year's social loans will reach about 130 million US dollars.