Lend Your Money, Turn a Profit
Your bank profits off money sitting in your savings account by lending it out at a higher rate than it returns to you.
So why not eliminate the middleman and lend your money to others yourself?
That's the proposition offered by financial Web sites ranging from
Though their models vary slightly, these social-lending sites aim to connect borrowers and lenders outside of traditional financial institutions.The benefit? Both borrowers and lenders can get better rates than they might obtain from a bank, while the Web site makes money off of transaction fees. Here's how these sites generally work: A borrower posts a request for a loan, providing both the amount and the interest rate he's seeking. Borrowers at LendingClub, for example, typically seek $5,000 to $7,000, most frequently to pay down credit-card debt. A lender, meanwhile, decides how much money she has to offer and what interest rate she will accept. The site then offers what amounts to an online marketplace, where the lender can view various loan requests and decide which to accept.
A New Asset Class?Once loans are made, the borrowers have the cash to pay down a debt or spring for that wedding. The lender, meanwhile, has a shot at a handsome return. LendingClub, for example, boasts an average return of 12.32% since May, when it launched on
The Philanthropic RouteBut not all the social-finance sites focus so directly on the opportunity to boost returns. While that's the model Zopa.com, a British company, uses for its U.K. and Italian sites, CEO Douglas Dolton says for the company's U.S. launch it wanted to do something aimed at Americans' philanthropic tendencies. So at Zopa's new U.S. site, a borrower receives his loan directly from one of the credit unions with which Zopa is affiliated, and investors -- not lenders -- buy certificates of deposit, currently yielding 5.1%, directly from the same credit unions. Like other CDs, the Zopa CDs are FDIC-insured and penalize early withdrawals.
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