Social Lending Networks, New Alternative to Banks

Some people get help by going online to find individuals willing to make loans.

ByABC News
February 10, 2009, 10:22 AM

April 5, 2008— -- When Tim Murphy wanted seed money to open a store in Marietta, Ga., to sell popcorn, he went to no less than 15 banks and filled out one application after another.

Each time, the answer was the same: "No."

"In every one of those cases, I got turned down," Murphy said. "So it became rather discouraging, because I needed that seed money to get me going."

Frustrated, he went online and discovered a different way to borrow money. They're called social lending networks, and they connect borrowers and lenders. Murphy chose a new online company called "Lending Club" and got the cash he needed.

"I went into great detail as to the reason why I wanted to do this business," Murphy said. He gave them a detailed business plan and listed his experience in marketing and sales, he said.

Even though he had no collateral, it was a risk 74 strangers were willing to take. They lent him a total of $25,000 at an interest rate of 12.4 percent. All of them were members of the Lending Club.

The Lending Club, located in California's Silicon Valley, is just the newest social lending network. Propser.com and Zopa.com offer similar services.

With beach chairs and ping pong tables for its staff, Lending Club certainly doesn't look like a traditional bank. But Lending Club members become bankers through their computers. The maximum they can borrow is $25,000, but they can lend as much as they want.

Here's how it works. A lender logs on to see who wants money and for what. Each loan is then funded by several lenders who get an average 12 percent annual return over a three-year period.

No single lender carries a full loan, so the risk is spread out among several people. The borrowers get a fixed rate, based on their credit score, which is usually a better rate than the bank would give and much better than they would get using a credit card.

Bernadette Liu has loaned out a total of $3,125, spread over 13 different borrowers. She's earning almost 15 percent on her investment. She says that's a lot better than the stock market or even bank CDs. But she said she is worried about two of her loans on which the borrowers are late making payments.

"It's a newer venture, so you never know," she said. "But I think my funds are diversified enough."