In the Realm of Good & Bad Debt, Where Does Social Lending Stand?

I had an interesting conversation with some blogging buddies recently. We were discussing debt, and I declared, as I often do, that debt is bad.

One astute friend remarked, “Then what about that ad at the top of your sidebar?”

Ah, yes, the Lending Club ad. How do I feel about Lending Club? Well, I wouldn’t be allowing them to run an ad on my site, if I didn’t think there was no positive value.

A Way for People to Help People

This video was recently brought to my attention. It tells the story of a man who returned from a tour of duty with the army, to find he owed 4 years of payments to his pension…about $16,000. He couldn’t qualify for a regular loan from a bank, so he turned to the Lending Club.

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Through the Lending Club, he got a loan to pay the money he owed toward his pension. When he pays it off, he plans on lending to others who need help.

So is This Good or Bad?

You all know that I hate debt, especially debt for things that don’t have lasting value. That said, I think peer to peer lending organizations, such as the Lending Club, have their place.

Especially with banks on such shaky ground right now, obtaining a loan through Lending Club is a good option, if you are responsible in taking out loans. Even though I hate debt, I realize that there may be times when loans are necessary. Starting a business comes to mind. Or maybe if your credit card interest rate got hiked up, and you need a lower interest rate, but can’t find a good low balance card. Finding 0% transer cards is becoming harder and harder.

Using a loan for debt consolidation might be a good thing, too….if and only if you’ve already changed your spending habits. After my experience with Citibank, I’d definitely prefer peer to peer lending over credit cards! Working with people is generally easier than working with outsourced customer service reps.

Lending with Lending Club Intrigues Me

Though I won’t be going into debt with Lending Club, the lending side of peer to peer lending interests me. As a lender, you can set your own criteria for borrowers, such as a minimum credit score, to minimize the risk involved.

I remember my mom telling me once that my grandfather invested money in real estate. And sometimes he would provide owner financing for young people, so they could get into a house.

I like the idea of investing to help people. Perhaps it’s in my blood. And someday, when my debt is paid off, and I have all of my other financial ducks in a row, I may just check out this thing called peer to peer lending and see if I can’t help someone else out.

What do you think? Is peer to peer lending a good thing, if used responsibly?

Photo by quaziefoto.


By , on Jan 26, 2009
Lynnae McCoy I'm Lynnae, wife of one and stay-at-home mom of two. I'm committed to getting out of debt by being frugal with my choices in life.


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  1. I love social lending or peer to peer lending as we call it in the UK. I use Zopa, which is similar to Lending Club. It’s great to see my money earning a good rate of return and knowing that it’s going directly into lenders pockets rather than greedy bankers.

  2. I find Lending Club’s site excellent for browsing. I am very excited to find it as a potential investment. I have worked hard to pay my debt down and now I am virtually debt free (except a few revolving small balances monthly and a small auto loan (now under 13K))! As soon as I can clear $5,000 or more to invest (this cannot come from my current investments or from my emergency cash fund) so I can get a PRIME account (which allows greater diversification) I will do so. I am sure with a diversified account and with the current financial waters the Lending Club can be a great investment opportunity.

  3. Hello,

    I’ve just come across the concept of a Lending Club, and I
    don’t quite understand it as yet. Obviously one person is lending another money. What I’d like to know is how does a “lendee” contact a “lender”? What guarantees must a person give that the money will be repaid. How are the amounts of the payments reached? What guarantees are needed to ensure that the loan is safe? How are the rates of interest arrived at and who does the calculating? Is there a central headquarters which enforces rules and regulations etc.etc.

    In fact, anything and everything that an ignorant person should know.
    But please send to my email address,

    Thank You

  4. I think lending clubs are okay and a good choice in an emergency. As with any debt, know your limits.

  5. Nice post. One thing most people don’t hear about P2P lending is that you aren’t making the entire loan to just one person. I’ve spoken about Prosper and Lending Club to several friends, and question #1 always comes back “what if person X can’t repay my $1000?”.

    So it’s a bit of marketing and/or facts issue since that P2P lenders haven’t tackled just yet. Fact is, you’re building a portfolio of consumer debt analogous to a mutual fund where the risks are spread out over a diversified number of smaller loans, not just one or two large loans.

  6. Chris Ronk:

    Lending Club is an interesting concept.
    I have no problem with moderate debt. It is the American way…

    Actually the American way is to become completely over our heads in debt until we can no longer function.


  7. My view of any debt is that “good” debt is debt used to finance an income producing asset.

    Applying that to peer-to-peer lending, I would feel better lending to a long-time manager of a fast food restaurant who wants to buy their own franchise. That type of loan has a high potential to help someone (the manager and their family, as well as the employees) and to be repayed.

  8. I think peer-to-peer lending is fine. I like the concept and how it works. Just like many things in life, it’s also open to misuse and abuse — and that’s when things go bad.

  9. Joseph:

    the question is misleading. is not if lending club debt is good or bad? the question i “what are you intending to use the money and how you plan to pay it back?”

    If the answer is “to get out of trouble and not sure how I’m going to pay it” then it is bad… if it is “to get out of debt, and I will pay with savings from high interest rate debt” then it’s good.

    I used lending club to pay my credit cards off and have since prepaid the loan. I’m now a lender because I believe in helping others out. Of course there are a few that default, but it is your responsibility to choose the loans you think are used for “good reasons”.

  10. I went through a period where I thought absolutely all types of debt was evil. It didn’t last too long though because I realized it’s not debt that is evil…it’s only even when WE misuse debt. Sadly, that is far too often in our society.

    Thanks for the mention.

    Product Ambassador

  11. I’ve made several loans through both Lending Club and Prosper and have had nothing but good experiences (though there are people who default on their loans). I love the idea of social lending and would recommend that a family member go there if they have the need for some money and are able to pay it off. They may just get a better rate for their loan than they could elsewhere.

  12. Beth:

    I ran into a large unexpected expense a little over a year ago and after being rejected by the bank, I turned to a social lending site to get the loan I needed. Going through the process with all the uncertaintly, the rejections and then having to basically suck up all my pride and put myself and my financial skeletons out there in a very real & public way to ask for money was by far one of the most humbling experiences I’ve encountered to date. It was the exact thing I needed to go through to smack myself upside the head and turn some things around with regards to my personal financial habits.

    Once things are fully cleaned up, I also intend to put some money back into the system that not only helped me out when I needed it, but also gave me the reality check I needed.

  13. I’m with you on this one, Lynnae. I like the idea of cutting banks out the picture, to a degree, to increase competition. Maybe if banks had to fight for our business a little harder they would treat us better.

  14. I think that lending is lending and debt is debt. :)

    Like many things in life – both are fine if used in moderation. Abstaining completely is also a fine choice.

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