The Family/Friend/Associate Networks

This is the type of financial system that Jack Byrnes would work out with the Fockers in his "circle of trust" scheme. Personal lending among family members, friends, and business alliances is often fraught with emotional hazards and financial risks. But, since many borrowers might have a low credit score but a high ranking among family members, this creates a situation where family members might tread where banks dare not go.

CircleLending — CircleLending asserts, "The average default rate on interpersonal loans is 14 percent, which is fourteen times higher than the one-percent loss rate in bank loans." Based on this risk calculation, CircleLending offers opportunities for families, friends, and business associates to help each other financially through person-to-person personal loans, business loans, and mortgages. Promissory notes and monthly electronic bank payments help to keep everyone happy. Once a loan is formalized through CircleLending, lenders control many of the same options lending institutions use to recover unpaid debts, such as collections, foreclosure, and tax deductions for capital losses.

Based in Waltham, Massachusetts, CircleLending was founded by former World Bank employee Asheesh Advani in 2000. This is a privately held company funded by individual investors and venture capitalists. CircleLending seeks to make a profit through the sales of various packages that range from their inexpensive "HandShake" programs to their more expensive intra-family mortgage plans. Their mission is to disrupt the traditional finance industry through the rationale that most family members would rather pay interest to their relatives than to a bank or credit card issuer.

FYGO - Your Friend in Finance — Located in Phoenix, Arizona, FYGO's mission is to "help bring back fairness and compassion to Finance by allowing individuals to lend, repay, gift and transact with people they know and trust." David Farias, CEO and Founder, held key positions at Phelps Dodge Corporation as Director of e-business and Business Solutions and as Director of Marketing and Customer Service before he launched FYGO's beta in November 2006.

FYGO's focus is on the family that is willing to build a network to borrow and lend money in short-term or emergency situations. Borrower and lender identities are verified, but credit ratings are not an issue. Joining FYGO is free. Creating or joining a network is free. Requesting and offering a loan is free. The lender and borrower are charged a minor one-time verification fee, and the borrower pays FYGO a small percentage on each loan and a fee for each loan payment made through an "Amortization Schedule" feature. FYGO's focus is on the disruption of payday, unsecured, bad credit, and instant loan companies that offer loans at exorbitant interest rates.

VanCity — Vancity is Canada's largest credit union, created in 1945. Although this is a banking institution, they've branched out to create a social/business lending operation called "The Peer Lending Program." This program, which doesn't require the traditional requirements to secure a loan, consists of groups of three to six business owners who are each interested in borrowing for their separate businesses. The group members assess and approve each other's loan requests, and approval is based upon the confidence that each group member has in the others' commitments, resources, and abilities to repay the loan despite poor or no credit histories.

Loans are small — from $1,000 to $3,000. Terms range from three months to 24 months, and interest rates are based on prime plus three percent interest. The group must meet once a month to review progress on all fronts, so anonymity is out of the question. In addition, membership to the program is limited to business owners in the Greater Vancouver, the Fraser Valley or Greater Victoria areas. Look for a local option near you in the future.

Unknown Person to Person Networks

This category encompasses several different perspectives on person-to-person lending through "trusted circles" among unknown individuals, much like the relationships that you would develop at a Rainbow Family Gathering. If you play along, share information, and follow the guidelines, then everyone's happy. If you default on a loan payment, other members might string you up by your ankles, just like the Rainbow Family would do if they catch you stealing from another Rainbow Family member. Credit-worthiness is a huge factor in all cases here, so make sure that your credit score is in shape before you apply to either Prosper or to Zopa:

Prosper — Based in San Francisco, Prosper plays along the same lines as the eBay auction atmosphere, which is fairly anonymous and that offers the best price to the lowest bidder. Lenders and borrowers bid on loans that can last up to three years and that currently are limited to $25,000. Prosper lenders can either dump all their money into one prospective borrower's coffer or they can spread their cash around to numerous borrowers. Borrowers and lenders are encouraged to join "groups," a move that can help to make or break a loan request depending upon the group's borrowing or lending history and current capabilities.

Prosper was co-founded in 2006 by Chris Larson, who co-founded and served as Chairman and CEO of E-LOAN, and John Witchel, a venture capitalist who developed BrowserCam, a patent-pending online tool for testing the cross-browser compatibility of Web sites, among other small businesses. Prosper generates revenue by collecting a one-time percentage fee on funded loans from borrowers, and by assessing a percentage annual loan servicing fee to lenders (similar to the fee that you might pay with a mutual fund). Prosper is backed by numerous financial investors, and its marketplace platform is patent pending.

Zopa — Based in the U.K., Zopa began with a group of people who originally worked as managers at Egg PLC (recently purchased by Citigroup). Zopa also has the support of several of the world's leading investors. It earns money by charging borrowers a nonrefundable transaction fee and lenders an annual servicing fee — similar to Prosper. Additionally, Zopa earns money through selling payment protection insurance to borrowers who want it, and with a service that routes people who can't borrow at Zopa to other loan providers.

Unlike Prosper, Zopa lenders are encouraged to offer small chunks of money to a number of individual borrowers in an anonymous bidding process. So, for instance, a lender who lends £500 or more would have their money spread across at least 50 borrowers in loans that usually last up to 60 months. Borrowers pay back their loans through direct debit, and if any repayments are missed, a collections agency uses the same recovery process that traditional banks use. Lenders can earn interest on their lending deposits while they wait for their money to be lent out. Some lenders, according to Zopa, "are earning up to 14 percent pa, and the average return on all money lent to date is 6.75 percent pa (figures are before tax, but after actual bad debt and fee)." Zopa hopes to open a San Francisco branch in late 2007.

Give with Your Heart MicroFinance Networks

The 2006 Nobel Peace Prize was awarded to Bangladeshi economist Professor Muhammad Yunus, a man who focused the attention of the world on the microcredit scheme he pioneered in Bangladesh. According to the United Nations Capital Development Fund (UNCDF), the World Bank estimates that there are now over 7,000 microfinance institutions (MFI) serving some 16 million poor people in developing countries. If you want to strive for an international peace award, then giving with the heart (and with your wallet, of course) is for you.

Kiva.org — Basically, microfinance is the supply of loans, savings, and other basic financial services to the poor in underdeveloped countries, so if you're a borrower who lives in the U.K or in the U.S., this venue is not for you. But, as a lender, the place where you want to go to in this situation is Kiva.org.

Kiva, a Swahili word meaning "agreement" or "unity," brings this microfinancial world to the average individual who wants to sponsor a business in the developing world. Matt Flannery began to develop Kiva.org in late 2004 as a side-project while he worked as a computer programmer at TiVo Inc. In December 2005 Matt left TiVo to devote himself to Kiva.org full-time. Angel investors and corporate sponsors currently support Kiva.org, but this institution intends to become fully self-sustainable by 2008 through the implementation of income streams that may include optional transaction charges to lenders and low-debt capital fees to "Field Partners."

As a lender at Kiva.org, you don't receive a security note, although you can receive updates from your borrower through his or her "Field agent" as the loan is repaid. The course of the loan usually lasts six to twelve months. Lenders do not make a profit on their loans through Kiva.org, nor are their loans tax-deductible. However, if individuals wish to donate to Kiva.org, that money becomes tax-deductible because Kiva.org is a 501c3 non-profit public benefit corporation registered in the state of California.

The Future of People-to-People Microlending

The ability to lend or borrow at a grassroots level currently is fairly limited. Additionally, the borrowing side to the story is even more limited than the lending, as seen from the microfinancing possibilities shown above. But, the buzz is on about peer-lending possibilities, so expect this venue to grow in the future.

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