5 Reasons Why Social Loans are Much Better

social loans

The prospect of social financing and social loans, in particular, is tremendously promising and appealing. Just the fact that it is possible to deploy private capital to service the public good, and earn a sizable interest at the same time, is sufficient for such an idea to enjoy widespread attention and popularity as a source of financing for many. In the recent years, with the dominance of social media in our lives, people have proved that the social loan model of financing is the most efficient way for individuals who for one reason or another prefer not to seek loans from traditional banks.

Before we highlight the five benefits of social loans over traditional bank loans, let us first get to know what social financing is.

What Is Social Financing?

To put it in simple terms, social financing is the use of private capital, often combined with funding from a government organization, to address a certain social requirement and to get a positive financial return. Until a few years ago, government institutions have dominated the social finance market but things are changing as there is an influx of social impact investment funds, non-profit organizations, and even mainstream investment establishments. With a program such as ‘DirectLoan’, the government targets student in need of loans and offers them a chance to consolidate several education loans into a single loan.

What makes social financing a better option for many people?

Let’s face it, ever since the financial crisis of 2008, a great percentage of the banking population is wary of banks. While the financial industry offers no new financial institutions that guarantee the safety of the depositors’ money, social financing is emerging as a more trustworthy form of banking that has a lot more to offer with less risk and higher returns. Some of the top benefits of social financing are:


1. Market segmentation

The strict regulation of traditional banks means that they have no room to cherry-pick the best borrowers and turn down the rest. Because no deposit is involved in social financing, lending institutions are regulated by the CFPB (Consumer Financial Protection Bureau) at the state level, which offers a lot of strategic flexibility to the lenders. Social lenders get to target students in promising career paths and low-risk borrowers seeking to consolidate their loans or to refinance a mortgage.

2. Better terms and low interest rates

Compared with bank loans with the most attractive terms, social loans are attractive in every sense. The terms are easily negotiable, and rates can be set based on the specific financial situation of the borrower, not the general market status. Generally, social financing thrives because the lenders offer very low-interest rates considering how few the steps of processing, dispersing and repaying the loan to the original capital lenders is.

3. Higher deposit rates

Traditional banks pay a measly 0.03 percent interest rates to depositors, but this can sometimes go as high as 0.08 percent in some banks such as Merill Lynch. Private capital providers take money from their bank accounts and hand it to a social lender who will lend it out and pay it back with significantly high interest—as high as 7.5 percent—many times over what the traditional banks offer. To be fair, people who provide capital to the social lending organization take a big risk investing in social loans over leaving their money in the bank, but the reward is worth it.

4. Better customer experience

Banks have hundreds of thousands if not millions of customers that they have to serve. With such numbers, it is impractical to provide personalized service. Social financing institutions deal with a much smaller number of clients and can afford to offer personalized services. The customer satisfaction levels are much higher amongst these institutions than traditional banks especially when it comes to loan information, problem resolution, products, and fees. Loan processing times and the fees associated with debt recovery are significantly lower.

5. Faster response to change

It’s no secret that the advanced social and financing technologies we use today will probably be archaic and outdated in a decade. Social financing was born out of new technology that has taken the world by storm—social media. As technology evolves, these institutions that rely on the social nature of the people evolve with it and newer and better resources and technologies contribute to its success. From small, short-term loans that used to define social financing to the huge mortgages and property financing loans people get today, it is easy to see why there is a chance the traditional bank may even eventually lose the race of financing to social lending institutions.

Have you considered getting a social loan for your next home project, course, or business? Well, now you know what you stand to gain choosing social financing over traditional sources of financing.