What is Social Lending?
You may have heard of social lending, perhaps even hazarded a cursory glance out of sheer curiosity; but when the dust settles and all of that nonsensical jargon flitters to the wayside – what is it all about? In a nutshell, social lending refers to people lending money to other people. In today’s increasingly internet-based climate, we can see this demonstrated by businesses or property developers dipping into a pool of funds provided by a group of investors. This is through the medium of an online platform.
One of the main benefits of social lending is that both parties are understood to potentially benefit from the process. The social lender chooses to lend money in the hope of their investment generating a return from the interest repayable on their loan. The borrower wants the loan from the platform due to faster or easier access to a loan. It’s a win-win situation, with both parties coming out on top. Those who borrow may be typified as developers who are seeking to refurbish or ‘flip’ a property. Alternatively, they may have short-term liquidity problems. With many borrowers now shying away from traditional financial institutions, Social Lending is becoming a much more common practice and has made its way well and truly into the mainstream.
How can Social Lending Benefit you?
There has been a huge rise in social lending in recent years. It’s no coincidence that the increase in popularity of social lending platforms in the UK – and people wanting to use them – has dovetailed with the collapse of returns from savings in the UK. In 2016, the average return on savings accounts in the UK was a miserable 1.23% – a figure that even failed to outstrip inflation. Hardly a turn up for the books. Alternative investments such as p2p social lending provided a new, potentially improved route for such investors. They could ‘be’ the bank, crowd together to loan money and enjoy better returns than saving with a bank. All social lending companies approved by the FCA can
be found in the Financial Services Register (FSR). You can find The House Crowd’s here.
It should be noted, however, that one arm of consumer protection industry, the Financial Services Compensation Scheme (FSCS) does not apply to the social lending industry. The FSCS is a regulatory body that offers deposit and investment protection for people when a financial institution goes bust.
The House Crowd does, however, possess a ‘living will’ which protects investors money should the company go into insolvency.
This agreement is in place with another FCA regulated company. In the unlikely event of insolvency, they will take over the business and implement contingency plans in place to manage the situation and returns investors’ money to them ASAP.All reputable social lending sites will make their risk warnings and procedures easily accessible and it’s always a good idea to familiarise yourselves with these before investing. View our P2P Underwriting and Procedures Manual to see all aspects of peer to peer property investments with us.
How Does Social Lending Work?
People who need money for property developments, for example, can approach a social lending platform and apply for a loan. If accepted, they can loan money from social lenders. These are people who come together on a platform (hence the word ‘social’) and pool their funds with their peers to provide loans at a target interest rate.
This process relates to a general phenomenon brought into effect by the internet, namely disintermediation – which is just a very fancy way of saying cutting the middleman out. In this case, banks are cut out to make the loan processes less costly and time-consuming for everyone concerned. Which, of course, is no bad thing.
What is a Social Loan?
A social loan can be two things. It can be a non-technical definition for budgeting loans, namely interest-free loans from the government for people who have been on income support. Or, perhaps, more importantly, a loan from a social peer to peer lending platform, more commonly referred to as a peer to peer loan. With such social loans, the borrower applies for a loan from an online platform. The platform will perform due diligence on the applicant before agreeing on terms for the loan repayment. Interest will be higher the greater risk involved, just as for social lenders, they can earn higher interest with riskier lending.
If social lending to individuals isn’t your thing, then there’s also property social lending, or, more precisely, p2p property lending. Social lending for property entails investors choosing from among properties they’d like to invest in and loaning the money for that property’s purchase. Interest is repayable on that loan. Part of the appeal of property social lending for investors is that your loan is being secured against bricks and mortar. Comparatively stable compared to other types of investment, property is considered an illiquid asset. That’s less than can be said for stocks and shares! Whilst still subject to risk, property investment is on the whole far more predictable and far more stable. You could, in fact, take your eye off the market for a few months without fear that your assets have suddenly plummeted in value!
Property social lending sites like The House Crowd’s appeal to borrowers due to being faster, being less hassle and offering more favourable rates than conventional lenders.