In an attempt to combat spiraling charges from payday lenders, Facebook has revealed details of a new app that lets friends to give out loans to each other. The app allows you to agree terms and conditions, such as interest rates and the amount you want to borrow, and you when you download the app you can become a lender or a borrower. However, as payday lenders are warning, there is no legal obligation to the friend to repay the loan.
It is thought that the app will be of particular interest to people with a poor credit rating, who don’t want to ask family members to borrow money, and are using payday lenders because of the anonymity. Many people however, with poorer credit history wouldn’t mind asking a friend for a one off loan. This new way of borrowing money from friends is seen as more of a social obligation, rather than a legally binding contract, but is here anything the lender can do if the borrower does not pay the loan back? Omar Fansa, founder of the app, insists that although the Agree It app works in a different way to traditional lenders, there are safeguards. The app instead relies on “the desire to protect one’s reputation and the power of peer pressure to ensure agreements are honoured”. This is very much the same way the auction sites such as eBay works, with customer feedback playing an important role in how buyers rate sellers on the site.
The app is free to download and use and will earn money from advertising and although the app may seem to be quite similar to peer-to-peer (P2P) lenders, even P2P lenders credit check potential borrowers, and they take a commission from the exchanged money. And Fansa thinks that lending money between friends is going to become much more popular than traditional methods, simply because of necessity: “Poor credit ratings and a reluctance to ask for help closer to home means [people] are increasingly taking on unsustainable debt that ruins lives. By seeking and offering funds within our social network, we can sidestep expensive credit and poor deposit rates and enable borrowing between friends and family at affordable rates.”
Borrowing using the app means that if friends do not fulfill their agreements there is a risk of being named and shamed on Facebook, with all your other friends seeing that you are an unreliable borrower. You are rated by the friend lending you the money after each transaction, which means that you can build up a separate “social credit score” from your credit history.
Fansa says that even though you could be at risk of losing your money if you lend it, there are benefits to using the app. He says: “The app offers people the chance to support others within their social network and gain a financial return.”
With the cost of borrowing £400 anything between £2.65 (Sainsbury’s Nectar Low Rate Credit Card) to £131 (Wonga), this app could provide a much cheaper way of borrowing money. Agree It app lenders would have to offer loans for less than 7.8pc APR however, in order to beat the cheapest loan rate on the market at the moment.