http://prosperl...ng-markets.html

http://prosperl...er-student.html

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.

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.

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.

If I wouldn’t have been blogging, I don’t know how I would pay all the loans 4real!

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.

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.”

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.