I don’t typically write first person stories about my own financial situation. However, I had a really positive experience with social lending. Although a lot of people have used peer-to-peer lending for both borrowing loans and investing money, there are still many people out there who don’t know if social lending is right for them. That’s why I thought I’d break from my traditional format to share my first person story about why social lending worked for me.
- Photo: Adam Jones
What is Social Lending?
Just in case you aren’t familiar with peer-to-peer lending yet, it’s basically a social option for borrowing and lending money. As a borrower, you create a profile explaining why you need a certain amount of loan money. Investors on the site can then choose to fund you. You pay a small interest fee for the loan, and the investors earn that interest for making the loan to you. The specifics of how the loan works, how many people fund you, and what interest rate you pay vary based on your creditworthiness and also based on which social lending site you choose to use.
My Situation: Why I Needed a Loan
When you apply for a peer-to-peer loan, you have the opportunity to explain precisely why you need the loan. You also get the chance to explain why someone would want to take the chance on investing in you. Here’s the information I shared on my profile requesting loan assistance.
“I am a freelance writer / blogger who has worked independently for nearly ten years. I am highly responsible with my finances and have been able to consistently pay all of my bills on time in spite of my freelance status. In fact, at the end of 2008, I had paid off all of the credit card debt that I owed and started a savings account.
Unfortunately, I’ve come into a series of health problems this year. I do have health insurance but it’s not covering a large percentage of the bills that I have to pay. None of these health problems are ongoing. (They are things like an emergency removal of painful wisdom teeth, which cost several thousand dollars.) However, two things have occurred. First, I am having trouble paying the bills without entirely depleting my savings. And second, because of the recovery time for my conditions, I’ve been working less, which has reduced my income.
I do have the credit cards necessary to make these payments if needed but was hoping to get a better rate on a private loan since my credit card interest rates are high. I have a very strong history of loan repayment and I do have a steady income despite the fact that it’s been reduced due to the medical conditions.”
Why I Chose Social Lending
I chose to get a $10,000 loan through Lending Club a few years ago. Note that I chose this social lending site because it had the best offer for me at the time, but I don’t have enough experience with other popular peer to peer lending sites (like Prosper) to say for sure how it compares. The reasons that I opted to get this loan through a peer to peer lending site included:
- I had fairly solid credit, but it wasn’t good enough to qualify for a loan this high from a traditional source like my local bank.
- After poking around the site, I learned that the interest rate that was offered to me through the site was favorable compared to any other loan options that may have been available to me at the time (even for lower loan amounts than the $10,000 I was seeking).
- I liked the idea of being able to benefit other individuals through the loan by having my interest paid to them instead of to a large corporate institution.
How Social Lending Played Out For Me
I was successful in getting the loan that I needed. I was able to get a $10,000 loan at an interest rate below 9%. The length of the loan was supposed to be 3 years with monthly payments just over $300 per month. That was reasonable for me. The payments were made automatically from my checking account each month, but I received an email notification before the withdrawal took place so that I was able to make sure the account had enough money and would never be overdrawn.
When my health improved, I was able to get back to a normal work schedule and to save up the money to pay off the loan early. There was no penalty for doing this, and the process was really easy. The downfall for my social investors was that they made a bit less in interest than they may have anticipated, but they did make some interest and were repaid in full.
Peer-to-Peer Lending In My Future
Because of my positive experience as a borrower from a social lending club, I would definitely use this option if I needed a loan in the future. However, I would still take the time to compare the rates of this loan with other loan options just to make sure it was still financially the soundest choice. Although I have not been an investor in one of these sites, I’m highly interested in pursuing that option in the near future.
Question for You:
Do you have any experience with social lending either as a borrower or a lender? Share your experience in the comments, if you do!
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I have been an investor with peer to peer lending for over 18 months now. I am so sold on the concept that I blog about it regularly now (link is above). Great to hear from a successful borrower. I know of other borrowers who have made the transition from borrower to investor after paying off their loan. Hope you do the same.
@ Peter – Thanks so much for the support. I look forward to making that transition! And also thanks for being an investor on these sites … it really does help people out.
About 4 years ago, I went into Prosper as a lender putting $3000 into the system. I made a lots of low lends ($50-$100 loans) mainly to AA, but some As, a few Bs, and very few Cs. 3 years later, I am in the hole $500. At this point in my lending prowess, I’m clearly not good enough at discerning good candidates to lend money too so I’ve stopped peer-to-peer lending completely. I have many other investments that pay back at least something. If I were a borrower, I would absolutely use P2P as a funding source. The terms are super, and the rates can be stellar.
@SailboatFamily, Unfortunately you got into Prosper a bit too early. For loans issued in 2006 and 2007 around 40% of them defaulted. Most investors lost money. In Prosper 2.0 (as well as Lending Club 2.0) the defaults are much lower and most investors are now making good returns. I am averaging around 10% at Lending Club after 18 months and quite a bit more than that at Prosper. I hope you will consider it again some time.
I love this article! I got into p2p as a lender over a year ago, and have now seen all my accounts paid in full. I couldn’t have earned 11% with ANY other method that would allow for the same kind of multiple, small investments. I am bummed that my state doesn’t allow for me to reinvest at the moment. Once it opens up for Nebraska, however, I’m in again!
Hi everyone,
So nice to read about borrowers’ success stories! It is very encouraging as we are launching our peer to peer platform to see that the model is not only working – it is also helping people out. We are very excited to contribute to the growth of this wonderful industry!
As Peter Renton stated in his comment, it is true that peer to peer lending began with shaky models, which led to bad experiences for some lenders (@SailboatFamily: very sorry to hear about your story). Today we feel confident that the industry has found a good business model to lower default rates and optimize interest rates for both lenders and borrowers.
Looking forward to sharing more success stories here!
Mikael
Since going from A plus credit to bad credit because of temporary health issues I was excited to come across these peer to peer lending sites. However, on both Prosper and LendingClub, I was denied because of a 5 point too low credit score. I always pay my bills on time and wish these sites would take into account such issues when they are denied even allowing to post a loan. I thought that’s what these sites were for…to acquire a loan when banks fail you? And I only asked for the minimum $2000.00 loan amount to fix my roof after the summer huirricane. Does anyone know of any sites that do consider personal situations when they do not meet these sites’ score limits?
I have just signed on here and am not quite sure how this works. I have been desperatly searching for a $10,000.00 loan but have worse than terrible credit. I am a hard worker with some terrible luck snd am simply looking for honest people to borrow from. Can someone please help and direct me as to where I can go from here. Many thanks.
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