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).