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Helping Debtors Find the Money

  • Written by T. Steel Rose

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rose steelI had a lunch meeting with several financial advisors this week. A few lamented how their clients are not able to maintain a budget to live below their means. They mentioned the temptation to use credit cards was too great and the resultant high interest rates only exacerbate the problem. When I mentioned peer-to-peer lending sites to reduce their annual percentage rate by 10% they stared at me in disbelief, like it was too good to be true.

These types of loans accounted for $5 billion in loans last year. The question is not as much, when does it makes sense to use peer-to-peer lending to refinance existing debt, but knowing the costs involved. Regulatory and compliance considerations may provide an option for cash strapped customers. According to “The Economist” the rapid progress suggests big banks and credit-card companies may be disrupted in the same way taxi companies have been disrupted by Uber. The major platforms, Lending Club and Prosper, offer online loans of up to $35,000 for three to five year notes. Chicago-based Avant also offers personal loans up to $35,000 funded by institutional investors.

Companies like Social Finance emphasize student loans and mortgages as they are pitching student lending services. San Francisco-based lender, Earnest, uses an algorithm and 80,000 to 100,000 data points to lend money to students with little to no credit history.

This list goes on. LendingHome, another San Francisco start-up, offers mortgage loans and allows accredited investors to participate with at least $50,000. Los Angeles-based AssetAvenue targets non-owner occupied, first lien, mortgage loans, and is open to accredited investors in a few states.

The point is trying to help a customer by making them aware of options is always a good idea. For small balance customers, San Francisco-based LendUp offers up to $500 for 35 days at 272.73% APR (as of October 22, 2015). While it is clearly exorbitant to the point of being predatory, their stated mission is to help people establish credit who don’t have standard creditworthiness.

When working with consumers, there are some distinct advantages to using Lending Club and Prosper worth considering:

• A fixed rate of interest is probably one of the most compelling advantages.

• The term of the loan from major social lending sites is either three or five years.

• There is no pre-payment penalty. Customers can always pay off loans early without pre-payment fees. The application process is fairly easy.

• The online application can take just a few minutes to complete and a decision on the loan occurs quickly.

• Once they have a loan, monthly payments are automatically deducted from their checking account.

• Unlike a home equity line of credit, the loan is not secured by your customer’s home. While they are obligated to repay the loan, they are not secured by any of their assets. The general requirements borrowers must meet to qualify for these loans include:

• Must be a U.S. citizen or permanent resident.

• Must be 18 years old with a valid bank account and a valid Social Security number.

• Must have a FICO score of at least 660.

• Their debt-to-income ratio (excluding mortgage) must be below 35%. The total of monthly debt payments (e.g., credit card, school loan, car payments) divided by monthly income must be less than 35%.

• At least three years of credit history, showing no current delinquencies, recent bankruptcies (seven years), open tax liens, chargeoffs, or non-medical collections accounts in the past 12 months.

• They can only have six or fewer credit inquiries on their credit report in the last six months.

• Must have at least two revolving credit accounts currently open.

When customers apply, they are assigned a rating based on their score and credit that determines the risk to other investors. If accepted, the listing is published and investors can invest into this loan or several. Along the way they ask personal questions regarding the loan and why. They may use portions of credit reports available to them and some of the questions may be used to test a borrower’s integrity in answering them. They may also ask for the customer’s tax returns or paystubs.

Although I don’t recommend it, in the new world of peer-to-peer lending it is even possible to become an investor/ lender and finance your favorite customer’s debt.