By Sean Emery, co-founder and CEO of RainFin
Social lending has arrived in South Africa, and it promises to change the game for people who need to borrow funds as well as for savvy lenders who want to get good returns on money they have to invest. It’s an option you should give serious consideration to if you are looking to put some of your portfolio in a higher-yielding vehicle than a bank savings or fixed deposit account.
The concept of social lending (or peer to peer lending) cuts banks out of the loop so that borrowers can pay lower interest rates, investors can get higher returns, and both parties can benefit from lower bank charges and fees. Though new to South Africa, social lending is proving to be wildly successful in the US, Europe and China.
In the US, for example, peer to peer loans have eclipsed more than $1 billion since 2006 and social loan volumes are around $50 million a month and growing, according to a report by TechCrunch.
From the perspective of a lender looking for better returns on their money, social lending is an investment opportunity that offers better interest rates than banks do for cash deposits. Essentially, you become the financer lending money to people who need it, an arrangement that is beneficial both to you and the people who borrow from you.
Each loan is facilitated through an online platform that allows you to assess the credit risks of prospective borrowers and then loan money to them at an interest rate that is attractive to you and to them.
As a lender, if you chose only to invest in AAA grade loans you might be able to secure returns of 6-10% compared to the 4-5% a bank might offer on a 30-day call account. Another benefit is that you will earn interest monthly from those that you loan money to, giving you an extra stream of income.
In the background, the social lending marketplace will have done the hard work of vetting each borrower’s credit record, so that you are making your investment decision based on transparent, accurate and up-to-date risk information.
The back-office infrastructure for credit-vetting and credit control ensures that only borrowers with a good risk profile are placed in the marketplace and that bad debts are effectively managed. It’s a cheap and convenient process that cuts out much of the cost and inefficiency usually associated with personal loans.
The high interest rates for investors do not necessarily come at a high risk, provided you take care to manage your investments efficiently. It is good practice, for example, to manage your investment risk by spreading your money across many different loans at once.
This means that you’re not exposed to one borrower, but spread your risk across a portfolio. The international experience shows that investors who adopt this strategy enjoy low investment volatility, coupled with returns that outperform traditional banking savings products.
Though there are risks to peer to peer loans, we at RainFin have learnt a great deal from international experience and have aligned ourselves with the best practices established by loan marketplaces in other parts of the world. Some examples of these include the following:
– We have strict general eligibility requirements for all borrowers. They are required to have identification numbers, be at least 18 years old, and belong to a financial institution.
– Our strict credit vetting process includes evaluation of credit report data, income, employment, loan amount and term and other information that may indicate the borrower’s ability and willingness to repay the loan. We take responsibility for sourcing additional documents such as payslips.
– Like the global P2P lending sites, we ensure that real names and other identifying information about borrowers and lenders is never shared.
– We report account activity to all three of the major credit bureaus. This means late or missed payments will damage a borrower’s credit score and make it more difficult for him or her to get a loan in the future. Serious delinquency could result in their account being handed over for legal collections
If you are disillusioned by the low returns you are getting from money you have deposited with a bank, then social lending is a viable investment alternative. As part of a diversified investment portfolio, it can give you great returns that outperform most vehicles with a similar risk profile.