Loanio is the new kid on the peer-to-peer lending block. The site officially launched Oct. 1, joining the ranks of established sites such as Prosper and Lending Club. The basic concept behind the company is similar to that of its rivals: Borrowers post loan requests on the site and lenders bid, auction-style, until the loans have been fully funded. Then Loanio manages repayment and any legal issues that may arise. But there is one way in which this social lending site differs from the competition: Loanio caters to borrowers with poor or no credit by making their loans a little less risky for lenders.
With existing peer-to-peer lending platforms, borrowers suffering from poor credit scores have limited options. Approximately 10 percent of prospective peer-to-peer borrowers get their desired funds, according to a statement by Loanio, Inc.’s CEO and founder Michael Solomon. That means that 90 percent of would-be borrowers on peer-to-peer sites do not get funding. A large number of loans that fail to launch are requested by borrowers with less-than-phenomenal credit scores.
Professional lenders often shy away from such borrowers themselves, so why would third-party lenders—typically “regular people”—offer them their money? The risks are often just too high for lenders to take them on.
But Loanio has come up with a system to give these borrowers a better chance at receiving peer-to-peer loans by adding safeguards to the agreement. Just like low-credit borrowers can receive financing from major lenders with the help of a co-signer, Loanio allows its borrowers to enlist co-borrowers. As in a traditional loan, these co-borrowers are legally liable for the loan and will be required to make payments should the primary borrower default. The co-borrower becomes liable for the payment amount and all late fees after the primary borrower is more than 26 days delinquent, at which time the overdue amount will be automatically debited from the co-borrower’s account.
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Additionally, the site offers verification services through which borrowers can confirm their financial information. This can help to reassure potential lenders that all financial data is accurate and reliable. Under normal circumstances, borrowers simply enter their income and other financial information themselves. If they choose to make use of the verification option, lenders will be able to breathe a little easier knowing that borrowers haven’t exaggerated their financial status.
“With options for [low- or no-credit] borrowers drying up elsewhere, we believe this feature and others on the website will fill a sorely needed void in the [peer-to-peer] lending arena,” Solomon said in a statement. “The idea is that we want to provide all borrowers with as many possible tools to shine and present appealing loan requests to the lenders.”
And, as an added bonus, even borrowers with upstanding credit scores can utilize these options to make their loan request even more appealing to lenders. “If you saw two loan requests for the same money and rates, but one had an excellent rated co-borrower attached to it and went through the Platinum Verification process, which one would you bet on? I think the choice would be clear,” according to Solomon.
Of course, no peer-to-peer platform can absolutely guarantee that borrowers will repay their loans in full. But, with protections such as co-borrowers and financial verification, the hazards of lending to high-risk borrowers will at least be on par with those of lending to borrowers with higher credit scores.
Borrowers with poor credit scores may also be more likely to accept higher interest rates. If this proves to be the case, savvy investors could possibly even stand to increase their profits by financing loans requested by low- or no-credit borrowers.
