Why Has ‘Family Lending’ Failed and ‘Peer-to-Peer Lending’ Succee

Question

Several companies have tried and failed to create a successful ‘family lending’ platform, whereby family members can lend one another money. Similar to a peer-to-peer lending platform, also called crowdfunding, a family lending platform enables relatives to lend one another money while the “platform” intelligently handles the contractual details and the loan servicing, e.g. payments. (Conversely, peer-to-peer lending platforms are loans from complete strangers). This seems like a great idea, the family lending model via an organized digital platform similar to Prosper.com. This would give family members more comfort when lending to other family members, since the platform takes care of all of the details. Not to mention family members who are lending can take advantage of rates of return that they would otherwise not be able to get in the current environment.

Many have tried and failed at the Family Lending Platform. CircleLending, a startup out of Massachusetts, launch its Family Lending Platform in 2000.  This later became, “Virgin Money USA,” a Virgin Group Company. The Virgin Group started Virgin Money USA in 2007, which was a stab at the Family Lending Platform business model, but finally withdrew from the U.S. market in 2010. The Family Lending Platform seems like an idea that could have been translated into a viable business model.

So why did it fail? Please share your comments below regarding family lending via a platform such as Prosper.com and why you think it failed. I am curious to see what others have to say about this topic of family lending via an organized, digital platform.

Sam Dangremond · Answer

Because family lending is just a specific sub-category of peer-to-peer lending, but restricted to people I already have tons of emotional baggage with.

Ian Ippolito · Answer

@Corey Dutton, LOL, that is probably a good rule of thumb. If Richard Branson can't do it, then it's probably really hard to do. :-)

That's really interesting that you do so many hard money lending deals to buy out family members. I didn't realize that opportunity even existed, but it makes complete sense.

Corey Dutton · Answer

Thanks @Ian Ippolito. Oh no, I would never, ever considering doing something that the sacred 'The Virgin Group' failed at in the U.S.! LOL. It may work in other economies but obviously it doesn't have enough demand in the U.S. market. I agree with you that lending money to family members is certainly risky business. In fact, we get frequent hard money loan requests for the purpose of buying out family members (and friends!) out of real estate investment partnerships. Actually this is a very common use of hard money, to buy out family and/or friends in real estate deals. Because do you think a bank is going to give you a loan because your cousin has hired all of his family members to run your apartment complex and now its losing money so you need to buy the cousin out? No way. This is only the kind of loan a hard money lender or bridge lender would do and it's expensive. But it can be much cheaper than what a family member is costing you in an investment. So, back on point here, yes you are correct to say that doing business with family members is a risky proposition!!!

Ian Ippolito · Answer

In my opinion, the model has several flaws:

1) disintermediation: if I'm going to lend to family members, why do I need to go to a third-party to do it, and pay a fee? I'm much more likely to disintermediate the portal and just do it myself.

2) Not enough network effects: if I need money, I probably have only a handful of family members that have the pockets to provide it (at best). And many, many people have no family members who can do this, and can't use the site at all. This is a very narrow scope.

On the other hand, peer to peer lending lets you borrow from the pockets of potentially anyone in the US. There's a much higher chance of getting what you want (the loan) when there is a lot more potential lenders. And there's a much higher chance of getting the amount you want as well.

3) Many people are hesitant to loan to family members: lending to family members entails personal risk that isn't there in a loan to a stranger. Many financial advisers say that the only way to be happy while lending to family members, is to assume that it's a gift and not a loan. If things go wrong, it isn't just a loan default and a few lost bucks. It may be the end of a family relationship that can never be repaired. For this reason, many people are very hesitant to loan to family members.

It sounds from your comments, that you are strongly considering creating such a site. If so, I would highly recommend that you be certain that you are 100% sure of what issues cause the failures of all the previous sites, and know that you have strategies in place to prevent the same thing happening to you. Good luck.

Corey Dutton · Answer

But it's already an agreed upon deal before you go to the platform, so the platform offering is nothing more than an organized, legal way to set it all up. This is why I like it. Versus crowdfunding where one takes a deal to the platform and the "crowd" or "peers" fund it.

This platform based approach to family lending would make it less litigious or problematic, I would think. Maybe there was just not the demand out there that would produce the numbers they needed to keep going? That's my guess. Any other thoughts about why this lending model failed? Please share.

Neil G. · Answer

Not Arms Length.

Why Has ‘Family Lending’ Failed and ‘Peer-to-Peer Lending’ Succee

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