Peer-to-peer sites gaining as source of student loans

Monday May 19, 2008

If your federal student loan doesn't cover all your expenses and banks are making it harder to get private loans, who can you turn to?

How about strangers?

That's what some students are doing at peer-to-peer lending Web sites. These sites typically connect people needing money with dozens of regular folks willing to lend $50 or so at an agreed-upon interest rate.

Usually borrowers at these sites seek several thousand dollars to pay off high-rate credit cards or for a business venture. But there is a growing focus on student loans. One new lending site deals exclusively with student loans. Another site added a service last week to ease tensions when families and friends lend money to students. And more such services are coming.

eer-to-peer lending won't take the place of the traditional student loan market. Indeed, you should always apply for federal loans before other types. You can't beat the terms.

But student aid experts see potential in peer-to-peer lending.

"These sites are in their infancy and have yet to gain critical mass," says Mark Kantrowitz, publisher of FinAid, an online provider of student loan information. "As they grow, they will eventually be another source of money for college."

Lending sites vary in their approach and fees, so read the terms carefully if you're looking for a loan. Here is how some sites work:

Fynanz.com is the newest lending site and deals only with student loans. The company is licensed to make loans to residents in seven states. It expects to add Maryland to its network within 60 days and be a national player by January.

Basically, you post how much you need to borrow over five to 10 years and the interest rate you're willing to pay. Lenders bid to fund the loan. The minimum bid is $50. The more lenders competing for your loan, the lower the interest rate you can get.

Fynanz divides borrowers into six risk categories, based on credit score, grades, school, field of study and class, says founder Chirag Chaman. Seniors, for instance, are better credit risks than freshmen. So are students attending colleges with high graduation rates. Fynanz won't accept subprime borrowers, or those with a credit score below 640 on a scale of 850. The higher the risk profile, the higher the interest rate will need to be to attract lenders.

A senior majoring in sociology at the University of North Carolina, with a credit rating in the middle, recently secured a $4,137 loan at a rate of 8.92 percent. The rate is variable and can adjust quarterly.

"These rates are very comparable to private loans," and might even be better, Chaman says.

Lenders are attracted by the rates, but aren't seeking to make the most money possible, he adds.

"It's a different kind of lender," he says. "It's someone who says, 'I want to help students. I want to build a future for them.' "

David Smith is a Fynanz lender. The Chicago financial analyst recently lent $50 to a student. Smith has about 500 outstanding loans totaling $23,000 on another peer-to-peer lending site.

"It's a diversification tool," he explains. "And the returns are pretty decent." Plus, there is satisfaction of helping someone who is starting out, Smith adds.

Borrowers and lenders remain anonymous to each other. Last week, Smith got an e-mail from his Fynanz borrower, Dano34, saying: "This has been a very smooth experience for me and a lot less stressful. Thank you for the faith and trust you have placed in me and I will not let you down."

There are fees, of course. As a borrower, you're charged a fee of 2.9 percent to 6.9 percent when the loan is disbursed, depending on your risk profile. The fee is added to the principal.

Fynanz also tacks on an extra 1 percentage point to the loan's interest rate to finance a guarantee fund. This fund will repay lenders all or part of their money if you default. After you repay 10 percent of the original amount, this 1-point charge is dropped.

Source:
http://www.baltimoresun.com/business/investing/