Social lending the next Web 2.0 phenomenon – Part III, the Why

In the first part of this series, we looked at a report issued by the Social Futures Observatory in the UK. In the second part of the series, we reviewed Zopa and Prosper, the two leaders of the social lending industry. Since both parts appear to be well received, I thought it would be good to continue the series looking at three top reasons why, I believe, people use these services to lend money.

It’s cool and trendy

There is no doubt that people online do things that are cool and trendy. I believe that both Zopa and Prosper make you feel “cool” when you become a lender. It’s like buying what’s in. Who doesn’t want to own the newest iPod or Wii? There is no doubt that around the water cooler it is always looks better to be the first to bring something new to the cooler. Right now, the idea of social lending is trendy. Will it continue? I am not sure because I still think the mega financial institutions will try to crowd out the space if these new players get too big. But right now $20 million is a drop in a hat for Citibank and the others.

Helping a cause to help you feel good

I believe this might actually be the number one reason why people lend money on these social lending sites. When you read the stories, your eye tears just a bit. Here is an example of a story on Prosper:

am the mother of a beautiful 7 year old daughter, who’s father does not help us out at all, except he farms 80 acres and we live in the rundown house for free. I am a hard working mother and I do have a full time job, but I have bad credit and no one will help me out and give me a second chance to prove my self.

Two years ago my husband decided that the did not want to help with his family so I have been trying to keep my head above water, but I am to the point that I can’t go on. I am trying real hard to hold it together for my daughter, but I do not want to tell her that she will not have Christmas again this year.

If the good citizens out there in the world would loan me the $6000.00 loan request I would be able to pay off all my debts and have just a little bit left to purchase a Christmas present for my daughter, you see I had to tell her the other day that we had no money so therefore she could not get a Halloween costume like the other kids at school and I hate watching her cry. If I was to get the funding for my loan I would be able to afford a $300.00 montlhy loan payment and would be able to put some money into a savings for my daughter. All I want to do is be given a second chance and watch my daughter blossom when I tell her that she could buy a Halloween costume or even see a present under the Christmas tree.I thank everyone that takes the time to consider my request.

To me this part of the social lending business is a lot like Girl Scout cookies. You want to resist buying the thin mints, but you buy them every year. Why? Because the young girl puts on a face that says, “please help me sir/ma’am.” So you melt and buy a box or two.

In this case, this woman tells you about her just wanting to buy her daughter a present for Christmas. How much more of a cause do you need? And when you donate lend her the money to get her daughter an Elmo, you feel good. A side note: I wonder how many of these stories are made up. I doubt Prosper or Zopa are actually verifying the story. Would be great to get some information from the companies about this issue.

It’s an investment

Let’s not forget that social lending is still an investment. Sure it has risk. Sure the risk could be big. But it is no bigger than stock or bond trading. If the return is as good as Zopa and Prosper suggest, you can make a lot more than a traditional savings or money market account. I am not sure I would compare them because the latter has virtually no risk. I would compare it to a stock or bond before I compare it to a savings account.

Conclusion

I like the idea of social lending and if possible, I would give it a try as a lender. You must consider the risks and rewards of this type of lending. I do not want you to lend the money for any of the reasons above without doing the research first. What other reasons do you believe people are lending money using this method? I would like to know, please post them away!