Taylor: Web sites formalize loans to family and friends

Web sites manage social loans Do friends or relatives ever hit you up for a loan because they know you have a nest egg?

Then they don't repay the money, or they take their sweet time making the payments?

Next time, consider using a social-lending Web site.

There are several that, for a fee, will set up and manage loans between families and friends. Virgin Money, LoanBack and ZimpleMoney are examples.

"What it does is it formalizes the process of lending the money," said Greg McBride, senior financial analyst at Bankrate.com.

If you want to lend money to, say, your brother-in-law, but you don't want the awkwardness of reminding him to make his payment every month, a social-loan servicer functions as an intermediary to disburse the proceeds and post payments, he said.

Gail Cunningham, spokeswoman for the National Foundation for Credit Counseling, said: "I think you could potentially be going down a slippery slope loaning to family and friends. The more you can make the parameters clear up front, the better off you're going to be."

Tim Burke, social-lending sales manager for Virgin Money, answered some questions about managing loans between friends and family. Virgin Money, a pioneer in the social-lending marketplace, is a unit of Sir Richard Branson's Virgin businesses.

• How do these loans work? "Virgin Money helps formalize a loan between the lender and the borrower," Burke said. Once the sides agree on an interest rate and repayment schedule, Virgin Money prepares the documentation and, if desired, services the loan.

It also issues e-mail payment reminders, provides online account access and year-end reports, and can report payments to a credit agency.

To set up and service a loan, Virgin Money charges $199 once, then $9 per payment, or, if reported to a credit agency, $14 per payment.

The payments flow from the borrower's bank account into the lender's account.

Bankrate.com's McBride said social lending to a youngster can help establish their credit history, particularly when more traditional credit remains tight. They would need to make their payments on time or it would have a negative impact.

• Why do people typically turn to social loans? "Our customers use social loans to help consolidate credit, purchase a car or home, and even help finance college in the form of a student loan," Burke said.

"Generally, the borrower will receive a more competitive interest rate from a family member than they may otherwise receive from a bank, and the lender will receive a better return than from a traditional investment vehicle like a savings account or CD."

• How is the payback interest rate determined? The borrower and lender decide on a mutually agreeable interest rate, Burke said. In Virginia, the lender can't charge more than 12 percent -- 18 percent for a second mortgage. Also, if the loan is more than $10,000, the Internal Revenue Service sets the interest rate.

• What happens if the borrower defaults? "The default rate for Virgin Money social loans is 5 percent," Burke said. Because Virgin Money is not a collection agency, delinquent payments and defaults are pursued privately.

Contact Iris Taylor at (804) 649-6349 or . Follow her on Twitter at http://twitter.com/RTDIrisTaylor.