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Web sparks person-to-person lending around the world

Social-networking principles have spawned a lending marketplace that lets individuals make loans to almost anyone.

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"It allows people to notice what I'm doing," Wheeler says. "It's a way for me to determine if we can expand on this beyond San Jose."

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Personalized lending has taken off in recent years as the phenomenon of microfinance has grown in scope and stature. With microfinance, a funding organization typically teams up with local partners in developing nations to capitalize tiny businesses, often with just a few or no employees.

Growth in social-network lending

The sector exploded between 2004 and 2006 as foreign capital inflows tripled to $4 billion, according to the Consultative Group to Assist the Poor (CGAP), a Washington, D.C., consortium of agencies. Just as microfinance was proving that small-scale lending can attract socially minded retail investors, others were pioneering alternatives in a similar vein.

In some cases, age-old investment ideas are getting a makeover. For example, people routinely ask friends and relatives for a loan, but would-be lenders often worry they might lose cash, or an otherwise good relationship, or both.

Sensing an opportunity here, Virgin Money in October acquired CircleLending, a six-year-old manager of loans among friends and families. It plans to add more types of loans next year.

For conscience-driven investors, this close-to-home investment option can be the most effective way to help someone in need, according to Virgin Money CEO Asheesh Advani. In these arrangements, he says, terms of the agreement can be whatever the two parties want them to be, and that allows for the kind of assistance that people value in real-life situations.

"If you want to help people, you should provide them with flexibility to do very simple things – like have grace periods, miss payments now and then, and take the mortgage with them when they move," Mr. Advani says. Banks and person-to-person loan brokerages, he notes, "would never allow you to do that."

Today's emerging opportunities come with a range of risks. Anyone who lends an uncle $20,000 through Virgin Money, for example, courts the prospect that he'll stop making payments altogether. In such case, the niece or nephew may need to call on a collection agency (supplied by Virgin Money) to pursue the matter.

Prospective lenders who aren't comfortable with these Web-based vehicles can still reap returns while lending to little-known businesses that reflect the lenders' values. RSF Social Finance, for instance, is until Dec. 31 offering a 4 percent return through its portfolio of funds. Borrowers are private companies that pass a series of social screens. It lends, for instance, to a carpetmaker in New York that's certified as not using child labor and also to a pioneer in the organic floral industry in San Rafael, Calif. Investors gain no equity in these companies since they're merely issuing loans through the fund.

For accredited investors, defined as those who earn more than $200,000 per year or have a net worth in excess of $1 million (excluding primary residence), the range of options is even wider. One example: Root Capital based in Cambridge, Mass., uses investors' capital to support sustainable agriculture ventures in Africa and Latin America. The firm boasts a 99.5 percent repayment rate.

Deep pockets aren't required

But deep pockets aren't a prerequisite for making a difference in creative ways. Reese, the Kiva lender, makes most of her loans in $25 amounts. She seeks out business people in Iraq and Afghanistan, countries where she says ordinary lives "are completely changed in part because of our military." She doesn't lend to sellers of cosmetics or dog meat in any country. And she's getting paid back: Only two of her 782 debtors had fallen behind on payments as of mid-December. Most likely, she says, she'll reinvest through Kiva as the loans get paid off.

"These people," she says of Kiva borrowers, "need the money more than we do."

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