Why is the person to person lending revolution called Social Lending? Simply because it is all about connecting borrowers and lenders in a community…in this case a virtual or online community. The question would then be…“What is common between borrowers and lenders and why would they ever form a community?” Firstly we need to look at what drives an online community or marketplace and then we’ll look at specifically what connects the borrowers and lenders to each other.
Online Communities
An online community is also a marketplace, whether it be a market for goods (such as eBay and Oztion.com.au in Australia) or the market for people selling and buying cars (such as Drive.com.au) or in this case the marketplace for money. Lending Hub is essentially a market where we match lenders (i.e. people with money) with borrowers (i.e. people who need money. The important factors that drive online communities is the ability to match people across distance or time and to provide them with ample choice which is often called liquidity or critical mass. The connection in this case is a mutual service and benefit to both the lender and the borrower.
What Connects the Lenders and the Borrowers?
The lenders have a different set of interests and expectations when they use a peer to peer lending site as compared to the borrowers. Lenders are looking for a few things which can be summarised as:
- an opportunity to make a decent return on their investment
- a transparent and easily manageable investment
- control over whom they will lend to
- control over the dedired level of ‘risk’ compared to the expected return
The borrowers on the other hand are looking for:
- successful acceptance by the bank/institution that they can borrow
- a low interest rate
- transparency around the terms of the loan
- ease of application
Lending Hub connects the borrowers and lenders firstly through an anonymous platform (using screen-names) and allows lenders to bid against borrowers’ loan listings. The social aspect is through the element of the loan listing and the auction process…essentially this is a dynamic marketplace for borrowers to auction their need for funding to lenders at the lowest rate possible. This kind of competitive environment is very similar to eBay and other auction sites and provides both an entertaining medium in which to conduct a transaction but also creates an unparalleled level of transparency in a single platform.
Peer to Peer Loan Groups: Additionally the social and community element connecting lenders with the borrowers is around online groups that can help to give lenders confidence that the borrower is a reliable person and has obtained approval from his or her peers.
We expect here at Lending Hub that the peer to peer loan community will take awhile to fully develop however we believe that this will be driven by the value that both borrowers and lenders obtain from the basic purpose of the social lending platform…to match people with money to those who need money and to do so safely, securely and in a fair manner.
Next blog will discuss the credit card industry in Australia.