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.
from the December 24, 2007 edition
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Here's how it works: Someone with at least $500 to invest browses Zopa's website (http://us.zopa.com) and picks at least one individual or company to help. Maybe it's Sage, a Mill Valley, Calif., husband-and-wife tutoring company that this month has been touting its goal to expand and serve underprivileged students. The CD buyer can opt either for the 5.1 percent interest rate or a lower rate of his or her choosing, which would in turn reduce Sage's monthly payment. The lower the rate, the lower Sage's payment and the more cash they have for their mission-based enterprise. And even if they default, the CD owner still reaps the agreed-upon return. Zopa guarantees its CDs because the borrower has already taken out a loan from a partner credit union, which bears the risk of default.
Zopa hopes the channel will strike a chord with affinity investors, such as religious individuals who'd like to support the efforts of similar-minded individuals.
That would be fine with Ben Wheeler, a Christian comedian who's taken out a loan for $10,000 to lease space for a new Christian comedy club in San Jose, Calif. Mr. Wheeler, (who goes by the handle "Pharaoh" on the site) says he used Zopa not so much because he needed help with his payments but because the online platform would give his mission-driven project more exposure than it would have otherwise.
"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."
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.
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