Could Social Lending Provide a Way Out of the Credit Crisis?

I am intrigued by an idea I read yesterday on the top 25 on idea-sharing site Change.org: Solve the credit crisis by empowering people to lend money. Social lending sites like Lending Club and Prosper already allow investors to directly lend money to borrowers, albeit on a very small scale. But what if banks didn’t decide whom to lend money to? What if you and I were to decide?

I’ve already written about my experience using social lending as a borrower. A personal loan I obtained through social lending (at a time I couldn’t have gotten traditional credit) enabled me to save about 5% on interest on an old credit card balance. It will be paid off this year.

Indeed, social lending provides some borrowers with more opportunities than traditional banking might—especially today. I’d be willing to bet, however, that social lending wouldn’t have approved a lot of the really bad mortgages and other loans that all fell apart this year. There is a difference between making a loan to a responsible person with a decent income but a shaky credit score and making a loan to somebody who has a shaky credit score and has no way to afford the loan.

Furthermore, social lending provides savers and investors with an attractive alternative to bank accounts and the stock market: Lenders choose their risk and their return. Even making relatively safe loans through Lending Club will yield 6% or 7% on your money, far more than you can get from even the highest yield savings accounts today, which cap out around 3%.

If you haven’t explored social lending, I invite you to give Lending Club a try. Apply for a small loan to see how it works. Better yet, lend some money yourself. Whether or not social lending solves the credit crisis, I really do think this is a part of the future of consumer finance.