Is social lending a better alternative to the usual unsecured bank loans?

Social lending has seen much popularity over the years with its promise of a win win situation for both borrowers and lenders. However, is social lending a better option compared to the usual bank loans?

Social lending is estimated to be a market worth £3.5 billion by 2010, according to the wall street journal’s site filife.com. It involves peer to peer lending where people can borrow from each other through an intermediary. The process cuts out the middle man (i.e. the bank) and reduces the costs involved in borrowing. On the lenders side, it offers a means of investing with returns in excess of the average interest rate % on savings accounts.

With APR %s of near 7% to 10% for good to average rated loans, borrowing via a social lending arrangement offers a fairly competitive rate. One site, Zopa.com published a typical APR on an A* personal loan as 7.5%, which is cheaper than a few well known high street banks and building societies.

The amount of money and repayment term may vary depending on the social lending intermediary but the typical quotes tend to be up to £15,000 over 5 years. The range may seem limited due to risk tolerances of individual lenders, unlike banks and financial institutions. For this very reason, the criteria for acceptance is usually rigid and a decent credit score may be required. Some social lending intermediaries may accept lower credit ratings with collateral as security for the lenders, but the APR% rates may be as high as 12%.

Verdict: If you require a personal loan up to £10,000 and have a reasonable credit score, it may be worth while considering the social lending option. The lower APR% rates will add a little more to your cash flow every month. However, social lending as a borrowing option would seem better suited for car financing, compared to a personal loan from a high street bank as the concept and collateral of a car is a viable reason to present to the lenders (who are human after all) and you may be able to enjoy a reduced your borrowing rate.