There is a new way to spell peer-to-peer lending: Fynanz. While you or I might not entrust the financing of our college education to a company that cannot spell, the txt-happy generation might go for it. And if they can find college loans at lower rates than at a bank, who cares?
Fynanz launched quietly on Monday. It wants to apply the peer-to-peer lending model (see Prosper, Zopa, Lending Club, and Qifang in China) to student loans. Right now, only students who are residents of Florida or New York can apply for a loan, but that will expand to the entire country later this year. Anyone can become a lender.
Unlike Prosper or other P2P lending sites, Fynanze guarantees each loan. And since they are qualified educational loans, the students can deduct the interest from their taxes once they start paying back. To reduce its risk, the startup looks at other factors in addition to credit scores when evaluating each student borrower, including grade point averages and what school the student is attending. Says CEO Chirag Chaman, a former banker who put up $500,000 in seed money to get the startup off the ground:
We looked at 15 years worth of data to create an underwriting model specific to student loans. We now what are the factors that reduce default rates. I was doing structured loans at Citibank.
You can think of it as securitization for the masses, but I am removing investment banks from the process.
The loans are co-payable to the school, and Fynanz takes into account tuition and other expenses to make sure students don’t take out more than they actually need. “It is not for your spring break,” says Chaman. By cutting out the banks, he thinks he will be able to find individual lenders willing to offer loans that are 0.60% to 1.0% lower than what a student would get from a bank. (And that is after Fynanze takes a 1% fee for its guarantee fund).
With interest rates coming down, though, in response to the Fed’s recent interest-rate cuts, it is going to be tough to compete with the big banks. But the focus on student loans should shelter Fynanz in comparison to other P2P startups with a broader loan portfolio (Student loans tend to have lower default rates than most consumer loans).
I would support a student anyway I can (I currently volunteer in teaching math to school kids), but I would not lend my hard-earned money to a student who is just starting his/her studies and God-knows-when he/she will be able to repay me. Include here the aggressive push of credit cards (with exorbitant APRs) to students and the power of companies that issue them to go after the cardholders if they don’t pay in time, and you realize that I have pretty low chances of getting my money back, and even lower chances to get them back in time.
Good luck to Fynanz!
im not going to school but will text my way to a college loan. LOL Ok now i am officially scared at the fact that this is what is going on with loans today.
“With interest rates coming down, though, in response to the Fed’s recent interest-rate cuts, it is going to be tough to compete with the big banks.”
Do your research, Mike. Most of these rate cuts are not being passed on to consumers. There are liquidity bottlenecks high up in the financial foodchain. Primary dealers are hoarding cash to maintain a healthy and robust balance sheet.
Erick I think you forgot to mention what’s in it for the lenders? Would they simply have the satisfaction of lending to students, or is there a competitive rate for them? Since fynanz is guaranteeing these loans, then there should be lower risk involved as opposed to prosper & co., right?
Erick,
You are a phenomenal writer, and your presence here has been a welcomed addition to TC. Now to slightly contradict two of your points in the above article:
1. Due to recently uncovered scandals in the student lending business (i.e., private lenders paying for financial aid officers to attend “seminars” in warm, sunny climates), several sources of commercial student loans are either curtailing their lending, or getting out of the business altogether. That seems to be a growing void that someone like Fynanz could fill.
2. Interest rates are low on extremely safe money–like Treasuries, etc. Note that the recent Fed cuts really didn’t reduce mortgage rates (and since mortgages are theoretically secured by property, they are typically higher up the safety ladder than student loans). And if these cuts by the Fed lead to higher inflation/lower dollar, then down the road the inevitable inflation-fighting interest rates may be plenty high enough to give Fynanz room to compete against larger entities.
Wasn’t there some entity that was trying to be a venture capital-ish source of funds for individual students? Something like, “Here’s $100,000 for college. Now give me 10% of your earnings for the rest of your life.”
Great, just what America needs. The tech industry creating an un-regulated loan shark industry. When will people learn?
Erick,
I have to disagree with the competition from the bigger banks part… even with the lower interest rates due to the Fed lowering their rate. I think the current situation now is a perfect opportunity for P2P lending startups.
First off, its harder getting a loan from the bigger banks now since they are trying to keep out of trouble
The lower Fed interest rates would generally mean more profits to the banks and the savings is not passed on to the consumers so the interest rates from the big banks would not be any lower than what P2P loans are offering.
This might be helpful, but I live in Hawaii
will finish my Masters in September.
If I wouldn’t have been blogging, I don’t know how I would pay all the loans 4real!
Good work and very Interesting.
@3 - Most student loans (if not all student loans) are based on LIBOR or Prime rates. When the Federal Reserve lowers their Fed Funds rate, these rates also move lower. So how is this not passed on to borrowers? Big banks always collect a spread over the base rate and these have remained constant.
The real issue here is with the credit history of these borrowers. How many of these young adults have a stable credit history? Most are lucky if they have any credit while they are in school. Unlike Zopa, LendingClub and other established P2P lenders who assess the borrower’s credit risk, Fynanz will have trouble evaluating the credit quality of the student borrower.
With that said, I really do not see how this model will work. I personally would not trust a 22-year old with little to no credit history to pay back his/her loan after graduating. If I were to lend my money it would be at a much higher rate than most student loan corporations like Sallie Mae, which defeats the purpose of this model.
Kevin - there was a company that offered money for college in return for future earnings - they are called MyRichUncle (UNCL). They’ve given up that business model and have become a more traditional lender. I suspect that speaks to the success of their previous business model.
I’m fascinated by the notion that Fynanz will be guaranteeing the loan for a stunningly small 1% guarantee fee. That ain’t enough to guaranty any kind of unsecured loan portfolio no matter how restrictive the credit criteria. And I’m not sure what kind of individual lender would take comfort in a guarantee from a company called Fynanz that is capitalized with $500k. That’s not quite a triple Aaa guaranty even in today’s world.
Thank you, cardiffgiant. I wonder if it would be just as hard to get out from under Fynanz’ loans through personal bankruptcy as it is to wipe out most traditional student loans.
The ebonics spelling of the name, just makes this service extra classy.
YO DIS STUDEN GETTIN FYNANZED, HOLLA!?
wowz, fynanz for skoolz - ken onl3 imprv ejumakashin! gr8!
There are a few reasons why I have my doubts that Fynanz will work:
Interest rates on student loans tend to be pretty low. It will be difficult to attract students to Fynanz, when they can just get a traditional student loan at a lower interest rate.
If the rates do get bid down low enough to compete with traditional student loans, the rates may not be high enough to attract investors, even if a minimum of 50% of the principal is guaranteed.
As with traditional student loans, the term of the loans are long. At a glance, I looked at some of the loans and I saw them ranging from 10-20 years. This is an extraordinarily long time for an investor to lock up money in an illiquid investment. They will need to eventually provide a secondary market to provide liquidity, otherwise they will most certainly be doomed to the deadpool.
As with traditional student loans, borrowers have the option to defer payments. Many investors won’t like the idea of waiting for up to several years before receiving their first payment.
In January I interviewed Fynance CEO, Chirag Chaman about Fynanz. You can check out the interview here:
http://prosperlending.blogspot.....udent.html
Bank system killer:)
It’s hard to become excited about a venture, however conceptually intriguing, when its name is so disgustingly smarmy, pretend-cool, and “web 2.0″ that it makes one physically want to vomit.