Social loans – how they work?
Community Loans They work both ways – we can both give them and take them, also over the Internet. They are often the only option for people who do not have adequate creditworthiness, and urgently need cash. In turn, for lenders it is an interesting form of investing money. What you should know about them and where to look?
Social loan – what is it?
Social lending is a direct transaction between individuals, usually through online services, without the intermediation of banks and other financial institutions. In such services we deal with:
- borrowers – determine their financial needs within the projects, although they can often also propose the interest rate and possible financial bonuses for the loan themselves,
- lenders – they search for interesting and most beneficial offers and then partially or completely finance them.
Social lending sites via the Internet
In the Polish Internet space there are several services that allow both taking and giving social loans. Despite the clear top-down rules that are universal for all such initiatives, the individual ones are slightly different.
Fellow Finance offers social loans to 153 million people in Europe. This is one of the most popular companies, which is characterized by high trust of recipients.
Cryptocurrency social lending
Of course, we can borrow money in different currencies and even in the form of cryptocurrencies. It is an interesting option for both the borrower and the lender, although we must then keep in mind that their exchange rate changes really fast. Therefore, we can earn or lose much more than it would result from the interest rate. Everything depends on which way the rate will go from taking a loan to repaying it.
Where did they come from ?
The financial crisis in 2008 meant that banks were no longer as willing to give loans as they once were, and even if they were, the terms were no longer as favorable as before. This event, although it is difficult to talk about it as an incident, because the financial crisis „worked” for many years – caused that on the market there was a certain gap, which was soon filled.
The number of people needing a loan has not decreased at all, in fact –it's not hard not to expect –it has even increased. This demand has meant that there have been quick takers for cash loans. These „benefactors” have noticed that borrowing money on credit is an excellent form of investment. More or less risky, but in about 90% generating steady profits.
Social lending is currently quite a sizeable segment of the Polish credit market, which is safely estimated at about 250 million PLN. But as you can guess – it is growing all the time and Poland is on its way to become the largest social lending market in all of Europe.
How the whole process looks like for borrowers
Of course, it is not the case that we register on a selected platform and immediately get the amount we need. Due to the fact that it is about money (often even large), the services require additional verification. Most often it involves sending a scan of an identity document and a confirmation transfer from a bank account. Optionally, they may also require documents concerning employment, income, fixed fees, statement of no liabilities, etc. Although, as a rule, they are not required, but they can significantly facilitate obtaining a loan.
Making an offer
If we want to get a loan, we have to go to a specific offer. We give in it the amount needed, the offered interest and the time in which we intend to repay the loan. Then we can only wait for acceptance from some lender or counter-offer. After finalizing the transaction money usually lands on our account the same day.
Social lending or instant loans?
Social lending is an interesting option in certain situations, but sometimes regular instant loans can be better. Although they usually have higher interest rates, so theoretically they are a worse choice, but there is an exception. If you have not previously used the offers of parabanks, you can get such a loan for free, which means that we give back as much as we borrow. Then it is much better solution than community loan, if we need cash quickly, but only for a short period of time. There are quite a few companies that offer them, so we should have no problem finding the right one.
Social lending as an investment
Investors are constantly looking for new opportunities to effectively multiply their money and there is no denying that there are more and more. The development of the Internet and online communities allows investors to look at the issue of generating additional earnings or even passive income a little differently.
Without a shadow of a doubt, community loans are one of the more interesting forms of investment. By giving them to other users we can count on earning in the amount of ok. 10% per year. However, this industry, despite its great potential also carries certain risks that we must bear in mind.
What is the risk connected with giving them?
Most investments carry some risk, so we always have to take that into account. In the case of community loans we have to reckon with the fact that the borrower will not be able to return the money on time, and sometimes even not at all. Although loans that are repaid on time are over 90%, so quite a few, but unfortunately the remaining percentage are loans returned after the deadline or not repaid at all.
Tax on community loans
People living in the territory of the Republic of Poland are subject to tax obligation on all their income (revenues), so earning money on social loans will also be required to pay the appropriate amount. In Poland, income (interest on receivables) resulting from the loan agreement is taxable – 19% tax on capital gains. This is the so-called. Belka's tax.
How do we calculate the tax due
- we add up all the interest that went into our account,
- round the amount up to the nearest whole zloty (between 1 and 49 gr we round it down, between 50 and 99 gr we round it up),
- multiply it by 0.19 (19% tax),
- Again, the result is rounded up to the nearest whole PLN and this is the amount of tax we have to pay and enter in the appropriate box.
Depending on the type of form, with the help of which we are going to settle, we should enter the due tax in the field „cash capitals”:
- PIT 36 (part M),
- PIT 36L (part K),
- PIT 38 (part E),
- PIT 39 (part E).
If you are self-employed, the income from this job is added to other income from source „non-agricultural business activity”.
What else to invest money in?
Social lending is an interesting form of investing money, because it has a pretty decent rate of return and a relatively low degree of risk. Nevertheless, it is worth considering other options, which often allow you to earn much more. However, before we move on to investing we should answer a few questions that will help us classify our expectations, possibilities and willingness to take risks.
Social lending is an interesting option no matter which side you are on. For people who need money and do not have sufficient creditworthiness or are in debt, and for all those who are looking for additional opportunities to multiply their capital.
Do you have any experience with community loans? Share your opinion in the comments.