Tired Of A Half Percent On Savings Accounts?

In Amy Tan’s novel The Joy Luck Club, a group of Chinese-American immigrant women form a bond. And a bank account. Pooling their money together during Mahjong games, they lend it out to someone in their group, should they need it. The idea is brilliant, and the idea of women pooling together money has been the basis of a few Hollywood movies. But in none of these fictional cases do the women charge interest. And what about men participating? What would happen if someone created a similar situation, but brought together diverse people who wanted to lend out their money with those who would like to borrow. Each party would set their own interest rate, and suitable parties would be brought together.

For example, maybe you have a friend who is looking for a business loan. If you had money to lend, you might hand it over to your friend, whom you trust. Bu you happen to have a few acquaintances who have some money to lend. These people might be in different cities, different countries, or just simply not know each other at all or very well. What if there was a way to facilitate a loan without having to bring banks or other lending institutions into the equation?

Well, this kind of peer-to-peer financing connection (Information Week), aka people-to-people lending, is already in place on the Internet. Unlike the fictional Joy Luck Club, interest is charged on loans, but people apparently are more than happy to pay for it since they get to choose what interest rate they can afford. The services profiled by the Information Week article are Prosper and Zopa – the latter whose name is derived from a business term which essentially translates to the middle ground between one person’s bottom line and another’s top line.

But sites like these are not just for bringing together people you know into a loan transaction. You can also lend your money out to others. Of course, lending money to unknown parties sounds like a fairly risky venture. To lighten the risk, there are options to source a loan from several people. There is also a sense of community-building, whose intent is to encourage borrowers to uphold their commitment to repay their loan. Essentially, the idea is an outgrowth of all the Web 2.0 social networking websites that are popping up like mushrooms.

To further the social networking paradigm, both services plan to offer an API (Application Programmer Interface) so that their peer-to-peer financing concept can be integrated on other websites. This sounds like a fantastic idea. Imagine, if you had some sort of church community or other peer group on the internet, you could build a custom application to allow lending between group members.

Inter-group lending is a far less risky venture than lending to unknown borrowers, since members are likely to know each other, or known someone who knows someone. Or, to preserve the anonymity of lenders and borrowers, the community’s treasury “department” could broker all loan transactions via a custom-built application running on their website. Anonymity of the lender would be conditional on repayment under the agreed-to terms. This sort of application could foster both trust in budding entrepreneurs and struggling small business owners. Loan rates would be lower, and because of community ties, participants would feel encouraged to repay loans on time, thereby probably getting out of debt sooner than with a traditional loan.

Sure, groups could conduct lending activities in person; however, that does not ensure anonymity. Furthermore, if the group’s website was used to feature loan applicants and their intended use of the loan, lenders could anonymously decide how they want their investment divided up amongst participants. As well, with the increasing reliance of banking online, using such a lending application makes the process more convenient for participants.

It’s too bad, however, that Zopa and Prosper have not considered teaming up to come up with some sort of technical standard for the peer-to-peer finance process that would facilitate an even wider base of similar services. That would mean that there would be more Prospers and Zopas, but these clusters of borrowers and lenders could interact with each other.

All in all, though, peer-to-peer finance takes a once common form of lending and polishes it up for the online world. While service is limited to certain geographic areas at present, due to due diligence in acquiring credit licenses, plans are in progress to make these services available to many more people.

Technorati Tags: technopedia, tech pedia, zopa, prosper, peer-to-peer finance, online lending, online investments

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