There’s no doubt that social lending is gaining in popularity and growing in numbers every day. More and more you hear of P2P lending being described as an investment because of the sizable returns that are often possible. Opinions vary about whether or not it is a good investment, but I’d like to consider whether it’s a socially responsible investment.
For anyone who hasn’t heard of socially responsible investing, here’s an excerpt from a post I wrote on the subject:
“The practice involves trying to maximize financial return while investing in companies that are deemed socially good. Such companies tend to favor policies of environmental friendliness, workplace diversity, fair treatment of workers, etc. Many socially responsible investors also avoid companies involved with alcohol, tobacco, and gambling as well as big oil or military contractors.”
The difficulty in determining whether social lending is socially responsible is the fact that there are so many types of social lending. There seem to be clearly socially responsible uses as well as clearly socially irresponsible uses. The classic example of socially responsible P2P lending is using Kiva to fund micro loans to people in developing nations. Since lenders don’t get interest on these loans, it’s easier to make the case that they are lending the money with purer intentions. The trouble is, even that argument would be dismissed by some in the personal finance community, namely those who believe that all debt is inherently evil and thus socially irresponsible.
I’ve been thinking about that argument ever since I read an interesting post over at Debt Free Revolution.
A few quotes from that post include:
“The lenders on the P2P lending sites are looking for borrowers to become their wage slaves.”
“I am not going to encourage anyone else to go into those chains of debt.”
“I would not be able to sleep at night if I were the ones slapping those chains of debt onto another person as a lender.”
Reading this post and seeing some of the positive (and negative) responses, made me realize that there is a counter-debt movement out there. Reasons for this anti-debt bias are widespread, but being in debt, or finally getting out of it, seem to be very common ones.
While I can appreciate that point of view, I do not agree with it. I have used debt as a tool to make my financial life easier through the years. Using debt responsibly has allowed me to leverage my credit and raise my standard of living. Raising your standard of living doesn’t have to mean living beyond your means. Taking on debt that you can afford to pay back can open all kinds of doors. It’s when people take on more than they can afford, or do not understand how debt works, that problems arise.
As defined earlier in this post, part of the goal of socially responsible investing is to make money. In fact, you try to make as much as possible. So I think the fact that people can earn interest on their loans shouldn’t automatically disqualify social lending from being socially responsible.
After thinking long and hard about the subject, I have concluded that social lending is too broad to get a definitive label as socially responsible or not. There are ways to use social lending in socially responsible ways. It’s up to the individual. A socially responsible investor can use P2P lending in ways that they would find acceptable. Such use isn’t limited to Kiva, though some socially responsible investors may only be comfortable in that realm. By reading loan descriptions and deciding which causes to support, nearly any P2P lending site, and certainly the major ones like Prosper, Lending Club, and Zopa, can be used in a socially responsible manner. Each lender has their own conscience to deal with and can adjust their techniques to the level where they maximize their financial returns while still being able to sleep at night.
This post is part of the latest carnival of peer to peer lending, hosted at Moolanomy.
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March 26th, 2008 at 10:29 am
Thanks for the mention, and glad my little post has sparked off some debate and thinking. While I will agree, the decision to borrow or lend is purely personal, I have discovered a great feeling of freedom since I shed my consumer debt. I am so looking forward to paying off my mortgage and being TRULY debt free
March 26th, 2008 at 10:36 am
Wow…What a quick response. I was just in the process of emailing you to ask for your opinion. Thanks for your input!
March 26th, 2008 at 11:06 am
[…] Is Social Lending a Socially Responsible Investment? There’s no doubt that social lending is gaining in popularity and growing in numbers every day. More and more you hear of P2P lending being described as an investment because of the sizable returns that are often possible. Opinions vary about whether or not it is a good investment, but I’d like to consider whether it’s a socially responsible investment. For anyone who hasn’t heard of socially responsible investing, here’s an excerpt from a post I wrote on the subject: “The practice involves t […]
April 3rd, 2008 at 7:01 am
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