Lenddo has a new (old?) twist on making small unsecured loans. When you apply, you must provide your online social networking site information. They scour this information to help determine your creditworthiness. You are deemed more creditworthy if your friends are more creditworthy. Moreover, they notify your friends about how well (or poorly) you have paid back the loan. These aspects help to solve the adverse selection and moral hazard issues endemic with these sorts of loans. Of course, the cost is giving up some privacy. You may want to take down those drunken hookup photos and you may want to "unfriend" that ex-con brother-in-law.
The new part is that this uses online information to get a better picture of how trustworthy you are based on the people with whom you associate. The old part is that this was a key feature of a small town banker 100-150 years ago. For the most part, this has been replaced by credit scores and employment history. Actually, most people in the town would judge your character based on who "your people" were. This could be abused if, say, folks did not like the color of your people's skin but it was also highly informative. As a consequence, it meant that once you were in a good circle, you would not want to give up those connections. Townsfolk were understandably wary of the stranger who came to town. Why did he leave his people?
Moral Hazard in lending believes in the principal “borrowers take bigger risks with other people’s money than they would with their own.”
ReplyDeleteI don’t think anybody who has loaned money to a friend or family member needs a class to tell them that other peoples’ money is better for investing. Look at all the real estate gurus who teach investors how to flip houses or build real estate empires. One of the first rules is “do not use your own money.” Hollywood was built on “getting investors” and studios went out of business because they could not pay their creditors; but studio heads still had their own private money.
This chapter reminds me of many conversations I have had with my daughter over the years. My favorite is when we are shopping. She will set her sights on a pair of jeans that is $100. She tries them on and gives me the look of how much she has to have them. We have the same conversation each time with the same result.
I say I am in $40. That is a reasonable price for a pair of jeans. If she is in for $60 plus the tax, they are hers. She leaves without them. I guess she only had to have the jeans with MY money; other people’s money.
This is an interesting take on the part of the loan company. The most common way of screening individuals who apply for a loan is through paperwork. Determining how responsible they look on paper is the only criteria they have available to make their decision. By asking borrowers for their social media information they attempt to broaden the information on which they can use to make their decision. The borrower also needs to be responsible with the information that’s available on these sites. The signals they make available can both help and hurt their case in the eyes of the lender.
ReplyDeleteThe impact social media has on our lives is huge. Whether you apply for a loan, a job, or are involved in a court case, everything on social media will be scrutinized to help paint the unknown party paint a better picture of you in their minds.