Social Lending for Social Change


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It is becoming increasingly common for investors to look at alternative investments in the current low-interest rate environment. Real estate has been the choice for many for years, but with another real estate bubble building, alternatives are looking more and more attractive. 

A newer strategy some are exploring is peer-to-peer lending, sometimes referred to as social lending. I came to hear about this opportunity 3 years ago. I was at first very turned off by the idea of lending my money to strangers, but eventually the prospect of higher returns pushed me over the edge and I tried them out.


In addition to the high returns, there are many reasons why peer-to-peer lending can be a good investment. But for all the numbers and stats that are thrown out there, both in support and against peer-to-peer lending, there is a less tangible one that appeals to me. That is fulfilling a sense of community and societal obligation and helping people escape the culture of debt.


A Culture of Debt

You see, consumer debt has become a way of life for Americans. Many of us are indoctrinated in it at an early age, and harassed at every retail store for a new card. The average amount of credit card indebtedness for an American household is $15,252. As is the nature of credit cards, the longer you hold a balance, the harder it is to pay off. Interest paid accumulates little by little over time, and as debt begets debt, many people are forced to take out more debt to cover payments, hurt their quality of life, and in extreme circumstances file for bankruptcy and lose everything.


When I first started looking at investing in social lending, the listings looked like a sad cross-section of the cultural debt problem. Prospective borrowers listed  numerous cards, each with their own long-term hefty balances. I browsed some listings this morning, and found professionals making 6 figure incomes who had hundreds of thousands of dollars in revolving credit card debt. It doesn’t matter how much your income is, that revolving debt is going to be an anchor for that person for a very long time.


Optimism and the Power to Change

Looking at listings like these was when I realized how powerful this business model could be with helping people turn their lives around. Taking out a peer-to-peer loan allows someone to consolidate their debt under one single loan. The loan comes with a fixed interest rate, fixed payments, and terms up to 5 years. And the best part is that for almost all borrowers the interest rate on peer-to-peer loans is lower than their revolving credit card rates.


Paying off your credit cards allows you to close them and remove the temptation to use them more. It gets the bill collectors off your back and you can plan for the same fixed payment every month, instead of waiting to see what your statement will say and hoping that you have enough. Having a fixed end date of payments lets you plan for the future, debt free.


Prospective borrowers make pleas stating that this is their goal and many call them liars, looking for even more credit to abuse. I am choosing not to be cynical, and knowing that if even one of these borrowers is able to break their cycle of credit card debt, it would improve their lives in ways I could never imagine.


In one of my favorite movies, It’s A Wonderful Life, during a bank run, George Bailey avoids saves his business by appealing to his customers as human beings who need to help each other out. Remembering that every person you meet, see in a news story, read about in a history book or deal with at work is a human being with just as complicated a life as my own is how I try to live my life. Like George Bailey, I feel like there is no reason to ignore humanity and people’s feelings just to earn a buck.


And at the end of the day, even if my investment does not help these people, I am still earning a great return and they are still saving money on interest. That is a win-win in my book.
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