Social Lending Reviewed

ElitePersonalFinance
Last Update: February 8, 2021 Loans

Ever hear of “social lending?”

Think of peer-to-peer downloading, but lending instead.

Well, here’s your 4-1-1 …

The concept. A borrower can be funded by an investor looking to act as a lender, allowing loans to be processed by the intermediary without needing to insure the funds.

The benefit. If you are a low credit borrower, social lending makes it possible to qualify for financing when you might not be able to anywhere else, also at cheaper rates than what payday lenders charge.

The downfall. On average, the interest rates are higher through social lending platforms than they are with brick and mortar financial institutions.

Here’s where it gets interesting!

Social lending sites are very advanced now. They have their own credit scoring systems, which use a proprietary blend of scoring factors to determine how you rank.

How Does Your Credit Score Get Calculated?

So your actual credit score might get used, which would be a pretty obvious scenario. The social lending platform will pull your credit score using your Social Security Number if it does. Then, lenders on the site can know where your credit status falls, and they have a better idea of how to gauge your trust.

But social lending platforms can rank on much more.

It’s fascinating where the world of finance is heading. Ever since Bitcoin came to prominence in 2011, the tech revolution has come back in full force. It is a race to create the most innovative products and platforms to dominate the industry for many decades to come.

So when it comes to social lending, there’s a company that has reinvented the wheel.

Go to BTCjam.com – a Bitcoin-powered peer-to-peer lending site.

After making an account at BTCjam.com, you are prompted with numerous verification options to evaluate your credit rating. Some of these are required to put up a loan request — such as verifying your identity and address. Others are optional, but you can use your social accounts to show trust if you have a weak credit rating.

That’s right …

  • Been on Facebook for six years? That’s a sign you are not someone who drifts around, so it boosts you a few points!
  • Do $10,000 in LocalBitcoins.com transactions? That’s a sign you have trustfully exchanged funds with others in the past, so it boosts you many points!
  • Have 100,000 followers on your personal Twitter? That’s a sign you are not going anywhere and that you might have some business worth, so add a few points!

Get it?

The more things you verify, the more your credit score improves.

That’s what makes BTCjam particularly cool?

With that said, make sure you are aware of both the pros and cons of borrowing from others online. Not all of these websites are set-up to offer the perfect borrowing experience.

Pros of Social Borrowing:

  • Even if your credit score and/or income proof is inadequate elsewhere, you might qualify for financing through a social lending platform.
  • If you are self-employed, run an online business, or have a bankruptcy on your credit report from years ago, but your credit and income are strong now, you can get the interest rates you deserve.
  • After you successfully repay your first loan, it becomes increasingly easier to qualify for more loans at higher amounts and with better borrowing rates.
  • As long as you go with a peer lending platform that reports to the major credit bureaus, the social loans you repay on time will improve your FICO score.

The Cons of Social Borrowing:

  • Getting funded is based on investors trusting you enough, but there are no guarantees that this will happen.
  • As social scoring metrics vary, and your online presence might not be the strongest, your real credit score can qualify you better than your social score would.
  • While you often get better rates than what most payday lenders offer, it is generally true that only the best-rated borrowers get optimal borrowing rates.
  • If you fail to repay on time, the delinquency could show up on your credit report and harm your FICO score.

Does Peer Lending have Identity Theft Risks?

One of the things that scare many away is the thought that an ‘average Joe’ would have their personal information.

This is not how peer-to-peer lending works at all!

This is what makes it cool. The funds are from a decentralized source — other people investing as lenders — while a central entity processes the data and transactions.

With our BTCjam example, they are a company that matches investors with borrowers. You can find listings from borrowers looking to get financed on their website. This provides general information, such as the verification types they have done so far.

For example, it will mention if the borrower’s social accounts were verified. Yet, the user ID and URL stay private from the lending users. Other types of data listed include address, bank ID, and phone verification, alternative borrowing accounts at certain other sites, and much more.

That means the only real risk comes from how your information is stored. No website is bulletproof. Even big names like Apple, eBay, and Target have had their databases breached in the past.

In fact, BTCjam suffered a security breach back in 2014 where an intruder managed to de-fund a select few non-2FA-enabled accounts. This particular company is much more secure now but, when it comes to identity theft, it still has the same general security risks as Target … and we all know how they had a big data breach years ago.

Will Peer-to-Peer Lending Hurt My Credit Score?

P2P lending networks do report to credit bureaus.

Some only report to one or two bureaus so watches out for mixed data that needs to be fixed. If you are delinquent or default on your loan, it will negatively impact your FICO score. Likewise, if you pay it off on time, it will be a positive for your credit rating.

This means you need to treat it as seriously as any other financing type. Make sure whatever you borrow can be paid back in time. Thankfully, it is usually easy to extend your loan by just paying off the interest for the meanwhile. This would not be considered running late, and when it gets paid in full, it will help your credit.

That said, when you use BTCjam.com, Prosper.com, LendingClub.com, or any other peer-to-peer lending network, you can build your credit.

Social Lending with Bad Credit

This is an innovative way to establish or re-establish yourself as a quality borrower.

It can be done whether you have had borrowing issues in the past. Even if you are self-employed with no income proof, you might be able to get a small loan and work your way up over time.

That’s really cool … and even better, sites like LendingClub.com will display an estimate of your credit score at any given time. They rely on an actual FICO score and not a proprietorially manifested one. By applying for a loan, you are essentially getting your free score.

Of course, not all sites report, and the way information posts on your credit report will vary. Before signing up for a particular P2P lending network, make sure to confirm whether they report and which bureaus if so.

Conclusion

If you have horrible credit, lucrative workarounds like BTCjam’s social credit scoring system make it possible to qualify. This means you could even start building credit through an unsecured loan instead of having to back a credit card with 100% collateral.

All said and done; peer-to-peer lending networks provide a safe and effective way for all borrowers to get financed.

But it is not just about whether the type of borrowing is safe; many social lending sites exist, make sure you use a trusted one!

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