Comparison of Online Social Lending to Microfinance: Prosper and Kiva

There are two main types of online social lending type sites that are getting some good traction in the US – there are P2P person to person sites that allow one person to lend money to another person for the purpose of earning interest and microfinance sites that allow people to lend to other people or communities in developing countries and provides small amounts of funds that help entrepreneurs build small community businesses.

We’ll take a look at the following types of lending sites and how they compare to one another:

1. Peer-to-Peer and Social Lending Sites

Sites such as Prosper.com, Circlelending.com and Zopa.com (in the UK) and Lending Hub (in Australia) these are first generation P2P, peer-to-peer or person-to-person lending communities. They offer borrower the opportunity to take advantage of potentially lower interest rates in an online social community setting often through a bidding mechanism where lenders compete to fund the loan. On the other side (from the borrowers) lenders can potentilaly generate a high return of investment should they decide to lend money through these channels. The important thing about social lending sites like these is that they eliminate the need for “middlemen” in the form of banks and traditional lending institutions, which should create better interest rates for both the lender and borrower. Ultimately, both the borrowers and the lender will benefit from theis exciting new financial platform and service.

2. Prosper.com

Prosper.com is a site similar to Zopa and Lending Hub. However, the site is mainly aimed at lenders who prefer to make a profit on their investments and is an online person-to-person lending site, which offers low interest rates to borrowers. Here is a quick run-through of the borrowing and lending process for this site. First, a borrower will post a listing for a loan, indicating the amount needed and the desired interest rate. Lenders on the same ties will bid for the amount that they are willing to lend to the borrower – and the end result is that the bids with the lowest rates are combined into one single, low-interest loan for the borrower. This way, both the borrower and the lender will benefit from the setup.

The site is the first P2P lending site in the US, which was launched in February of 2007. Since its launching date, there have been a lot of positive reviews about Prosper.com. Its niche market are individuals who prefer to have lower interest rates for the money that they are borrowing as compared to loans obtained from lending companies or banks and aside from that, they also target small businesses by offering them microloans. Although there are some valid criticisms, the future of Prosper.com looks bright enough at the moment– which bodes well for individuals and entrepreneurs who would like to have an alternative funds source in the form of social lending websites.

Prosper.com allows lenders to set the minimum interest that they would like to have, which is based on a $50-increment up to $25,000. On the other hand, borrowers can create loan listings which can be up to $25,000. There is a one-time 2% fee charged by Prosper.com from the borrowers’ funded loans, as well as a 1% service fee for lenders.

3. Kiva.com

Kiva.com is also a community lending site which is referred to as “microfinance”. Unlike the first two sites which focus on lenders and borrowers Kiva.com more of a “social conscience” website. Basically, they work in partnership with microfinance institutions all over the world so that they can gain access to and help third world countries. The target borrowers of this site are small enterprises in a developing economy to help boost their business and empower the people by lifting themselves out of poverty.

The site was launched last October 17, 2005 by Matt and Jessica Flannery. Kiva is now considered to be one of the fastest growing microlending or social lending platform in the Internet today. For as little as $25, individuals can lend funds to small businesses from developing countries. Their target market is individuals who would like to make a difference in the lives of people from developing countries.

Overtime as online loans and microfinancing becomes more sophisticated we’ll probably find more sites offering more products and a great range of services. We’ll keep you posted on what we find out there on the net!