Young Black Professional Guide

Think outside the box. Of the top cliché’s of the past decade this has to be at the top of the list. But how often do you actually embrace this mantra? Over the past 2+ years some innovative minds along with the help of the internet have pushed traditional financing and investing options to the next level. Peer to peer lending is an intriguing model that has its roots in the old-fashioned handshake deals of the past.

Peer to peer lending is trying to re-establish the FFA(Family, Friends, Acquaintance) finance connection. Many a person, Richard Branson of Virgin for one, have received the startup money for their business venture, down payment on a home/vehicle, or just to get by money from an FFA. In a perfect world, all the deals done using the FFA model would work and everyone walks away smiling. The reality is that ISH happens. When it does, money issues can strain even the tightest of relationships. This is one of the reasons the traditional banking methods have become so common. If you don’t repay a loan to the bank, your credit will be damaged, but at least you won’t have to see your banker at the next family function.

For Borrowers

Sites like Zopa and Prosper allow you to create listings for your loan. This is where you tell prospective lenders your story. Then investors (lenders) will bid on the loan. If your credit is stellar, you receive the highest loan rating by that site which corresponds to a lower starting interest rate. At Prosper, the loans are 3 years, unsecured, with fixed payments. At Zopa, the loans are 5 year, unsecured, with fixed payments. When a lender bids on the loan, they only bid on a percentage, so the loan is held by a group of individuals all with varying amounts. Nifty huh?! Depending on your credit and the story behind your need for the loan, it is possible to get a better rate than at the bank.

Virgin Money works a little different than the above sites and is closest to the old fashioned hand shake deals. With Virgin, there is no bidding by strangers on the loan, you have to know the person doing the financing for you. Then, Virgin takes all of the dirty work out of FFA loans for you. They assist with drafting the loan agreement, payment processing, reminder emails, and year-end statements. This way, you can go to Uncle Roscoe to help finance your business idea and he will see that you are legit.

For Investors

At Prosper, the investors have several choices for their dollars. They can bid on portfolio plans that vary from conservative to aggressive. All are dependent on the risk profile of the borrowers in that plan. At Prosper, your investments are not guaranteed. This page lets you know about the default rates.

My personal favorite for investing options is Zopa. This is because Zopa partners with credit unions around the country to guarantee and insure the investment. When you invest through Zopa, you actually purchase a Certificate of Deposit from one of the Zopa Credit Union partners. You then decide, depending on the borrower, how much help you want to give them. If you know the borrower or think the idea they have is good, you can actually lower their borrowing rate. This may reduce your return, but it pays off with warm fuzzies. The ability to actually help someone AND get a guaranteed return is a deal that is tough to pass up.

Odds & Ends

–As an investor the returns that you make are taxable.

–Be sure to research the pros and cons of each model before investing. It is, after all, your money.

As always, for more info check out www.molifeney.com

[pic courtesy of zopa.com]

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