Using Peer-to-Peer Lending Sites to Make Lending to Family Members More Successful
ByWhen you loan money to friends and family members, you’re likely never going to see the money again. There’s no consequence to the borrowers’ credit score if they don’t repay the loan and chances are you’re going to be too nice to perform any meaningful collections. For a while, Virgin Money hoped to alleviate some of those problems, but they have recently pulled out of the US market.
What if instead you found a way to invest funds into a collective pot of money that would be used to fund personal loans and then your friend or family member could borrow from that collective pot of funds? Your friend would still get the loan he or she wants, but then only a small portion of the loan would be funded by you, and then you could use the rest of the money to fund other people’s loans and have some level of diversification and avoid losing a bunch of money if your friend ends up not paying the loan back.
It’s entirely possible to do this using peer-to-peer lending sites such as Prosper or Lending Club. You could have your friend create a loan listing on the site, then you could fund a portion of the loan, and allow other investors to fund the rest of the loan. You could then take the money that you didn’t put on your friend’s loan and then use that to fund other loans.
This way, your friend would get the loan that they wanted, and you would be able to get an interest rate on the money that you were going to loan to your friend, but probably at a lot less risk. A good analogy would be the consideration of investing in stocks or mutual funds. You could put your money in a single stock and turn out fine, but the single stock that you put money into could also be the next Enron. You could also invest in thousands of companies at once, knowing that on average you’re going to make money.
If you have a friend that simply needs a loan and you don’t have much interest in funding it and earning a rate of interest from them, you could simply take yourself out of the equation and have them create a loan listing on Prosper or Lending Club and then you wouldn’t have to be involved at all. There are plenty of investors on these sites looking for high-quality loans to fund. This way, your friend would get their money and you wouldn’t be taking on any risk or have to put out any money so that they can borrow the money they want to.
Lending money to friends or family members usually doesn’t turnout well. Although default and delinquency rates aren’t calculated for these types of loans, they’re probably substantially higher than a traditional bank loan or even an unsecured loan from Prosper or Lending Club. The best solution is to not loan money to friends and family and instead put your money into savings, stocks, bonds and real estate, but if you are considering loaning money to a friend, maybe a process disintermediation on the loan by using a peer-to-peer lending site might be away to mitigate some of the risk that you are taking on and provide you a better rate of return.