Virgin Money out of Waltham, Massachusetts has been in business since 2001--first as Circle Lending, then as Virgin Money in 2007 when Sir Richard Branson (owner, Virgin Records) bought a majority stake in the company. Asheesh Advani, CEO of Virgin Money USA, started his company when he saw a need for the proper management of informal loans between friends and family. And his booming company provides the tools for just that.
Virgin claims to be "pioneers in the social finance sector," and for good reason. Their personal loans have a default rate of 5 percent when most personal loans, without the oversight of a company like Virgin Money, have a default rate of almost three times that (14 percent). In an economy where people with cash to invest are eyeing the stock market with suspicion, where better to invest than in a family member or friend you know and trust, right? Investors are seeing returns of up to 10 percent in the p2p market.
A Friendly Debt?
According to Virgin Money the benefits swing both ways. "Imagine: Aunt Sarah as your mortgage lender!" their site says, promoting the notion of a feel-good relationship between borrower and lender. And from a borrower's perspective, why not send interest payments to your friends and family instead of the bank? If all goes well, this situation is ideal. But the idea of a loan between friends gone bad isn't ignored by Virgin Money. They don't deny the historical tendency for relationships to sour when money is involved. In fact, they claim that with their oversight and financial tools, problems can be avoided in the future, thus sparing borrower and lender from sticky situations and spoiled relationships.
Master to the Lender
From all appearances, Virgin Money provides every tool to make a loan between friends clean, tidy, and professional with terms, interest rates, documents, etc. But what about the notion that a borrower is ultimately master to his lender? It may not be an overt mastery, but an underlying one, nonetheless, and not a characteristic you'd find in many close relationships. Perhaps this distasteful notion could be part of the success of Virgin Money; perhaps it aides in the urgency to pay off a loan sooner and without default. However, money experts such as Dave Ramsey (The Dave Ramsey Show and Lampo Group, Inc.) strongly and loudly discourage lending money to friends and family specifically because borrowers who have been turned away from banks have already been deemed too risky an investment. And he should know. In a financial crisis, Ramsey himself defaulted on a loan for which a cosigner was stuck paying. He goes on to say, "If you truly want to help someone, give money." On the other hand, financial expert, Suze Orman, does not seem as opposed to the idea and provides some tips on her website for making personal loans effective, some of which parallel the tools used by Virgin Money.
There are many things to consider when borrowing or lending money in the budding social financial sector. Companies like Virgin Money address these considerations in a novel way, seeking to take the sting out of borrowing from relatives. Check out their website for more information on their vast array of products.
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This post was authored by frequent contributor and freelance writer Liz Elden.
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6 comments:
I think Dave Ramsey is right in the sense that if someone can't get a loan somewhere else then you are taking on a pretty big risk by lending them money. On the other hand, if someone can easily get a loan and is very credit worthy then I think it is a win-win situation if you want to lend them money and collect the interest rather than having it go to the bank.
Great review of Virgin Money Liz. Thanks for this post!
This reminds me of a post I wrote about the pros and cons of lending money to family and friends through Prosper about 18 months ago.
I think Virgin Money is a great idea if you have a family member or friend who is willing to loan you the entire amount you need. That is probably a rare case.
Lending Club is a better option if you want to borrow from people you may not know or if you have a family member or friend who can put up part of the loan but not all.
Liz, this is great! I'm an adoptive parent, and during one of our kids' adoptions we were surprised with a legal fee five digits long. Mind you, we were across the country from home and traveling home with our new daughter. YIKES! Family members jumped in and helped us out, but I would have loved to have a more documented process (for our family's peace of mind). Virgin Money would have really come in handy for us back then!
Matt,
I agree--I meant to include a blurb recognizing that not everyone interested in p2p lending has been turned away from banks. Certainly if you have good credit and want to take advantage of the benefits Virgin Money has to offer, then this is a great way to go.
This was a marketing piece, not a review. Virgin Money can't make money on P2P loans - never have despite huge marketing programs. Given they are in the traditional mortgage business now (after acquiring Lendia last year), I don't see why they are not giving P2P loan services away for free to grow their relationship base for products that make money. $99 for an unserviced personal loan between friends and family? It's just not a good deal (loanback.com is $12.95). I like these guys, but the dog don't hunt.
95% of the time it's a BAD IDEA to lend money to friends or family...if you want to do P2P lending go with the Lending Club!
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