Friday, March 21, 2008

Fynanz becomes the first P2P student loan marketplace

This week Fynanz became the first peer to peer lending company to specifically target the student loan market. Fynanz allows family, friends, alumni or just about any American with $50 to help students meet education expenses such as tuition, books, room and board, and living expenses. In addition to helping students, lenders have the opportunity to earn a fair return on their investment.

In a recent interview with PLR, Fynanz founder Chirag Chaman said, "We're in the business of making sure students get a competitive student loan and we believe that education is the best investment."

Borrowing initially open to New York and Florida. In this initial launch phase, borrowing is restricted to students with a primary residence in New York or Florida but Fynanz will gradually open to more states. Although the borrower's primary residence must be New York or Florida, the school borrowers attend can be in any state.

Chaman said, "We plan to start originating in five additional states starting next month." Fynanz is based in New York and wanted to start with nearby students. In addition, Fynanz picked Florida because of the unique market situation. "Recently, many have looked to tap the equity in their homes to pay for their children's education," explained Chaman. "However, many homeowners, especially those in Florida, are currently feeling the pinch from deflated housing prices and the current credit crisis." Lenders can be from any state.

Fynanz purposely launched during a student loan "off season" to ensure they have the technology right and all their systems are tested. "We expect the momentum to pick up in early May and grow steadily through August and September," Chaman said.

Loan amounts. Borrowers can take out loans in amounts ranging from $2,500 to $20,000. In addition, they can take out multiple loans - up to 4 loans per year, with at least 60 days between each loan request. The maximum aggregate loan amounts are $120,000 for undergraduates and $160,000 for graduate students.

Rates. Unlike Prosper and Lending Club, rates are variable and based on the LIBOR index plus a margin range which is set by lenders in the marketplace. For example, the current base rate from the LIBOR index is 3.62%. Suggested margin rates range from 3% to 7.5% for a typical overall rate of 6 to 11% before fees.

The base rate on Fynanz loans adjust once a quarter. The next rate adjustment will be July 1st and based on the average LIBOR rate from April, May and June. Today the 1-month LIBOR rate, as published by the Wall Street Journal, is 2.54%. Assuming the fed does not raise interest rates, it is possible Fynanz rates will drop about one percent in July.

Fees. Lenders pay Fynanz an annual 1% Servicing Fee. Borrowers pay 2.9%, 4.9% or 6.9% depending on their credit worthiness. This fee is added to the overall loan amount. In addition, there is a 1% fee which goes to a Default Prevention & Guarantee Fund. After borrowers have paid off the first 10% of their loan the 1% fee is removed.

Tax benefit. Interest payments on Fynanz loans may be tax deductible for borrowers since they are "qualified" education loans.

Lender and borrower verification. I found it much easier to become a lender on Fynanz than Prosper. In most cases, you will not have to fax documents. You do provide your social security number and answer questions from your credit report that only you should know. It does take a couple days to verify your bank account.

Borrowers, on the other hand, must meet more stringent verification requirements before their listing is posted. Chaman said, "Borrowers must either pass all eligibility criteria and be creditworthy on their own or utilize a cosigner, usually a parent, who is both creditworthy and can provide the required proof of income. Getting all the paperwork together and verified can take a few days."

Loan term. While Prosper and Lending Club loans are for three years, loans on Fynanz may be open for much longer. For loans less than $5,000 the repayment term is 10 years and loans greater than $5,000 the repayment term is 20 years. While in school, a borrower may choose academic deferment where no payment is due, and a six month grace period after completing or leaving school. Borrowers may also choose to make interest payments while in school. Fynanz indicates they may periodically offer to repurchase a loan at a small discount to face value to lenders who have held the loan for at least one year.

Default Prevention and a Fynanz Guarantee. Fynanz repurchases a loan which is fraudulently obtained through identity theft. In addition, Fynanz has taken a unique position in the P2P lending market where they will share the risk with the lenders. Fynanz guarantees range from 50% to 100% of the amount lent and are determined by the FACS Grade for the loan.

  • Platinum Honors - 100%
  • Platinum Plus - 90%
  • Gold Honors - 80%
  • Gold Plus - 70%
  • Silver Honors - 60%
  • Silver Plus - 50%
Fynanz Academic Credit Score (FACS). The FACS grade, which also helps determine the interest rate a borrower pays, is determined using a credit scoring model that uses academic characteristics to differentiate borrowers and ranks risk by expected default rates.

Chaman explains, "Unlike other P2P lending sites, having a great credit history does not automatically mean a borrower will get a lower rate. A borrower’s credit profile simply determines eligibility and access to our marketplace. The interest rate charged to a borrower will depend on the FACS Grade assigned to the borrower. The higher the GPA or the closer the student is to graduation is what counts. Our research shows that juniors and seniors tend to be a lower default risk, thus they will receive a higher FACS Grade and therefore a better interest rate, compared to a sophomore or freshman."

Rolling launch. According to Chaman several borrowers have started the verification process and the first loan requests should appear on the site next week. Lenders can sign up now, verify their account and prepare to transfer funds to bid on upcoming loans.

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