Financial Jungle

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Today, I was approached by Dave Coleman who is a lead Community Advocate from a new social lending player, CommunityLend.

The whole concept of social lending is relatively new to me. In a nutshell, CommunityLend is an online marketplace that brings ordinary lenders and borrowers like us onto an efficient and nimble platform, thus bypassing most of the overheads from traditional banks and credit unions. This would ultimately leave a lot of money on the table.

“Share the wealth,” CommunityLend pledged.

Borrowers stand to benefit from the best possible rates with multiple lenders competing against each other to bid down the interest rates. Once an auction hammer strikes, the unsecured loan is directed to borrowers’ account, and repayments are automatically deducted every month. To learn more about becoming a borrower, visit I Want To Borrow.

Lenders also benefit because according to CommunityLend, “To keep things as safe and secure as possible we will use virtually the same processes and service providers as banks and credit card companies use for validating identity, sourcing credit information, moving money between parties and enforcing collections.” You can visit the I Want To Invest page to learn more about becoming a lender.

As far as I know, CommunityLend is the first of its kind in Canada, and they’re not even open for business until mid-2008. But apparently, social lending is proving to be a smash hit in countries such as UK and US. UK-based social lending mogul, Zopa, has a member base 190,000 strong across UK, Italy and US, and they’re marching into Japan. According to Zopa, the average return for lenders is 8.1% with a stunning 0.1% default rate.

Since CommunityLend’s website isn’t fully functional yet, you can get an idea of what the auction screen might look like at US-based Prosper. Here you’ll see a list of loans each describing the purpose of the loan, borrower’s credit rating, current bid, and amount funded so far. If you need another example, check out Lending Club.

Dave wanted to know my first impression of social lending. I think it’s a good idea to have new competitors against banks to fight for our dollars, but I still have the following questions/concerns:

1. How does CommunityLend get paid?
2. What happens when a loan defaults? Will CommunityLend fight for the lenders?
3. Can lenders diversify by slicing their money into different loans?
4. How do lenders and borrowers determine what’s a justifiable interest rate for a particular credit score? Is there a primer available for lenders and borrowers to educate themselves prior to an auction?
5. Can a lender back out before the term is over? Can he sell the loan to another lender?
6. What’s the anticipated ratio between the number of borrowers and lenders?

[Edited Apr 12, 2008]

Disclosure: I’m not affiliated with CommunityLend. This is not a paid post.

Additional readings:
* Social lending the next Web 2.0 phenomenon
* Social lending set to soar
* Looking to become ‘an Ebay for loans’

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1. I’m watching our Canadian exchange rate in complete disbelief as the dollar advanced to 95.33 US cents on Friday. While my US positions (30% weighting) are getting whipped, I’m contemplating if I should snatch up some global dividend-paying US blue chips. The higher Canadian dollar buys you more US shares. At the same time, businesses with significant international revenues should benefit from the cheaper US dollar.
2. Value Discipline explains why a diverse market is healthier than one with homogeneous thinking. Passive, value and technical investors need each other for the market to flourish. Group hug everyone!
3. If you have kids, don’t miss out on these free monies from the government: spousal amount tax credit, tax-deduction on day care expenses, Universal Child Care benefit, and Canada Child Tax benefit. Reference MillionDollarJourney and Canadian Capitalist for more juicy details.
4. Walter Updegrave warns against mixing your investments with insurance products. Tax saving is the sales pitch, but the humungous fees will drag the portfolio. I’ve written a similar piece on universal life insurance.

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