How to Respond if a Family Member asks for a Loan (Part 2)
In part 1 of this post, I discussed the tough love options (and reasoning behind those options) available to a family member when another family member asks for a loan. In this part 2, I want to cover a further aspect of responding to a family member’s request for a loan.
Another aspect of using a direct lending site is to formalize a loan transaction between family members. As discussed in part 1 of this post, such formality can reduce the stress associated with the debtor-creditor relationship between family members and reduce the risk of doing permanent damage to the relationship.
When the purpose of the loan to a family member is to assist in purchasing a home, formality is clearly required so that the lending family member can receive collateral for the loan in the form of a second mortgage on the property. One of direct lending websites – Virgin Money- is specifically geared toward mortgage loan transactions.
Here are brief summaries of the most popular direct lending sites:
One of the most popular direct lending sites is Prosper. Here, prospective borrowers make requests for loans and can write a publicly viewable “story” about why they need a loan. The borrowers must also allow Prosper to disclose certain information about the borrowers credit history to those who are considering bidding on making the loan. Loan bidders can offer to make specific loans, so if you want to lend your money to a family member, you can tell them to submit the loan request to Prosper and you can then bid on it. Keep in mind, however, that all Prosper loans are for three years at a fixed rate. Also, the borrower pays a fee of 1%-3% of the loan amount, depending on the credit rating. The lender pays a 1% annual loan servicing fee, to cover the costs of setting up the loan (including documentation) and collecting the payments. Payments are drawn directly from the borrowers bank account.
Lending Club is another social lending site. (It currently is not accepting new lenders.) It is designed for borrowers who have decent credit (minimum credit score of 640) so your family member may not qualify. Also, if you are interested in making the loan yourself, Lending Club would not be the place to go because you cannot select a specific loan to make by using the name of the borrower. The fees paid to Lending Club by borrowers and lenders are similar to that of Prosper. The loans are also for 3 years, with interest rates set by Lending Club based on a loan “grading” scale.
Zopa is new to the U.S. but has been involved in social lending in Europe for a good while. It also requires a minimum FICO score of 640. Loans of up to 5 year terms can be obtained. One nice feature is that Zopa will lower the interest rate on the loan based on certain borrower performance criteria. This creates incentives for the borrower to adopt better money habits. This might be a good reason to send your family member to Zopa. It has a unique scheme in which lenders get an insured CD in exchange for a loan investment. This would not be the place to go if you want to make the loan to a family member. Zopa does not charge direct fees to borrowers or lenders, except under specific circumstances. It appears that they get an interest override from credit unions which borrowers must join as a condition of getting a loan.
Virgin Money U.S. is the new evolution of an older social lending site called CircleLending. Virgin (Richard Branson) bought Circle Lending and re-branded it. It is the place to go for very simple, basic loans between friends and family members. For a fee of $99, Virgin Money will set up the loan documentation based on terms that you submit and issue a repayment schedule. From that point forward, the family members are on their own. However, for another $100 fee, Virgin Loan will also assist in servicing the re-payment of the loan through electronic funds transfers.
Virgin Money is also the place to go if your loan to a family member is going to be a mortgage loan. For mortage loans, fees range from $649 for a basic loan package, to over $2000 if Virgin Money is going to close the loan and service it. Virgin Money is not the place to send a family member who is looking for an unknown lender to make the loan. Virgin Money is the place to go if all the borrower is looking for is help in formalizing a loan with a known lender, such as a friend or family member.
In summary, if you want to help a family member who has asked you to lend them money, consider sending the family member to one of these social lending sites, either to find a lender or to formalize a loan that you are willing to make. In this way, you are at least providing helpful information that may go a long way in preserving harmony within the family.
Here is part 1of this post if you want to read more about responding to loan requests from family members.