Can't Get Credit? Try "Social Lending" From Family and Friends

There may be plenty of credit out there, but the traditional lenders such as banks and credit cards companies are certainly making it hard to get it. So, one Massachusetts company is taking lending, literally, back to hearth and home, with the help of maverick venture capitalist Richard Branson.

Virgin Money is a small firm that tries to tap an alternative source of lending based on family and friends. Rather than deal with lending firms that are going to suddenly raise their credit requirements, 18-month-old Virgin's idea is to rely on trust and friendship inherent in close personal ties to free up needed funds.

"Borrowers and lenders, siblings, parents and child, need to find each other," Helen Payne Watt, director of content, told me. Her group helps arrange unsecured debt and mortgage financing agreements among people with trusting family or friends. Other companies will set up private loans among strangers in a kind of marketplace arrangement. But Virgin believes that doing so among people who know each other makes the success of lending more likely.

Virgin can arrange a straight, uncomplicated promissory note for about $99. Other it can organize a loan, payment requirements, methods of payment, payment tracking and all documentation for $199 or more. Each time a payment is made, it charges $9 as a service fee. Mortgage services are more expensive.

One example could be a woman who owes a total of $10,000 on the credit cards each with an APR of 18 percent. At those rates, she'll pay $18,600 over almost eight years with payments of $200 a month.

But, the woman could go to a friend with funds. With Virgin's help, they set up a loan and payment program whereby the borrower gets $10,000 from her friend and pays off her credit card bills. The borrower then pays her friend sums of $200 a month at a 5 percent interest rate. She pays $11,400 back in less than five years.

If the borrower defaults, the friend can call in the note or sue her. Or they can work things out. The borrower pays off her debt more cheaply and sooner and doesn't get credit score penalties for taking balance transfer offers from credit card firms. Her friend gets ot help out plus 5 percent interest.

Virgin handles all documentation and monitoring, but it doesn't do credit checks. Due diligence is the responsibility of the lender. Watt says that if the lender knows that the borrower has some issues, safeguards can be worked in, such as higher interest rates to cover the risk or structuring payment dates around when the borrower has good cash flow.

More recently, Virgin has branched into mortgage financing among family and friends. Although more complicated, customers find it helps to have someone else do the paperwork, Watt says.

Given the tight financial times, Watt says there's plenty of demand for social lending. Her business has grown four times since Richard Branson took over its predecessor, Circle Lending, in June 2007 as a way to push the Virgin brand in U.S. finance. Indeed, with traditional lenders in disarray, it might just be time for borrowers to rush to the safety of home.