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Back to School with Peer To Peer Loans

TuitionU is now offering two funding methods for college students seeking supplemental tuition funding.

They’ve partnered with GreenNote to offer peer to peer student loans at 6.8% plus a 2% origination fee. Lenders will get a 5.8% return on their investment with a $100 minimum investment. These student loans are disbursed to the institutions instead of the student, so you can feel good about not funding a keg party on Friday night with your investment. Not only can students solicit student loans online but they can also invite friends, families and social networks to contribute towards their loan. Prospective investors can search which loans to fund based on school affiliation, major, sports or even Greek societies.

Additionally, TuitionU is partnering with National Lending Associates to allow tuition loans to be stretched from the usual ten months to over ten years.

TuitionU is a division of Cology and makes its money by charging loan origination fees on the loans it issues. In 2008, 15 lenders offered $125 Million in private loans to students. This year, more than 100 Lenders are prepared to offer $400 million in loans.

The TuitionU alliances come at an excellent time, as Fynanz left the US market back in January as a provider of peer to peer student loans.

Jessica Ward is a freelance writer based in Seattle, WA. She writes on personal finance, family and frugal living. You can follow her on twitter as @jessc098 or visit her online at www.pennywisefamily.blogspot.com

People Capital prepares for 2009 launch

People Capital announced they received funding from the Radcliff Group in an effort to prepare their student loan peer to peer lending site for the 2009 academic year. An excerpt from the press release is reprinted below.

Fynanz, the first peer to peer site to focus on student loans, recently suspended accepting new borrowers and lenders due to "market conditions."

People Capital, developer of an innovative peer-to-peer student loan platform, announced today that it had secured a second financing round from Radcliff Group Inc., a New York based private equity firm. The funding will be used to enhance People Capital's Human Capital Score™, a model that provides a true measure of the creditworthiness of a student, and to develop its next-generation peer-to-peer (p2p) lending platform to provide improved access to private student loans.

Warren Serenbetz, Jr., CEO and President of Radcliff Group, stated that, "People Capital offers a truly unique approach to education financing, combining traditional and innovative approaches that produce an attractive yet safe lending scenario for students and the individuals and institutions that invest in their educations." "Our peer-to-peer lending platform brings a unique solution for students to finance their college educations. It leverages our cutting-edge research into developing a credit risk assessment methodology based upon students' potential, rather than merely their credit payment history," said People Capital Founder and CEO Thomas Shelton.

"Our unique Human Capital Score means that we can underwrite students without credit history by being able to project individual income levels and ability to pay. Traditional methods ignore a student's potential. Based on research coming out of The Wharton School Insurance Department, we incorporate merit data such as GPA, standardized test scores, college and major to provide a true and unbiased, data-driven measure of the economic value of an education. Our credit assessments will allow lenders to make credit risk decisions based on the true potential of the borrower."

Poised for funding the 2009 academic year, People Capital has formed a world-class team of professionals including veterans of the student lending, consumer finance, credit ratings and new media industries. A more detailed business plan is available to qualified investors and institutional partners.

P2P lending: 2008 in review

The P2P lending marketplace changed significantly in 2008. Of course, we said the same thing in our 2007 P2P lending review. There are also likely to be even more significant changes in 2009.

In 2006 the only real P2P lending story was Prosper. In 2007, Lending Club launched and Zopa expanded to the U.S. In 2008 the story is dominated by regulation - Lending Club obtained a green light by the SEC and most other companies shut their doors as they work towards SEC approval.

Here's a look at each individual company:

Lending Club

First a quick review of 2007: launched inside of Facebook in May 2007 and loaned $100,000 during their first month, expanded to users outside Facebook and became the first p2p lending platform to loan to borrowers nationwide without state-by-state lending caps, hosted a popular YouTube video contest, and received $10 million in venture capital
In April 2008 Lending Club halts lending in order to register their secondary market and lending operations with the SEC
In October Lending Club re-opens for investors and announces a secondary market

Prosper

First a quick review of 2007: named one of the 50 best websites of 2007 by Time, passed $100 million in loans (now at $108 million), received $20 million in venture capital for a total of $40 million raised
April - Follows Lending Club's lead and eliminates state rate caps
October - Immediately after Lending Club reopens, Prosper enters a quiet period and halts operations
December -Prosper is fined $1 million. They then file a S-1 registration statement with the SEC.

Zopa

First a quick review of 2007: Zopa expanded from the U.K. to the U.S.
Named 'most threatening non-bank' in April by the 2008 Retail Banker International Forum.
In October I had a bad experience trying to obtain a loan from Zopa. A couple days later Zopa closes operations in the US

Loanio

Loanio launches in October with a focus on platinum verification and co-borrowers
Follows Prosper's lead and halts operations in November in order to register promissory notes with the appropriate securities authorities.

Other companies to capture our attention in 2008:

Swap-A-Debt seeks regulatory approval
Pertuity Direct announces they will launch 'immediately after the New Year' And they do.
Fynanz becomes the first P2P student loan marketplace. They halt p2p lending and rebrand themselves (Jan 2009) as a loan platform for credit unions.
In Canada, IOU Central beats CommunityLend to Canada's market for a couple of weeks in February before they halt operations to 'resolve a regulatory matter'. We are still waiting for the first p2p lending company to open in Canada.
In January 2008 Globefunder opens their doors to borrowers. Since they are only open to institutional investors we have not discussed them on the blog much since.
Microfinance grows in the U.S. and around the world. We will cover these companies more in 2009 than we have in the past.

We started Prosper Lending Review in 2007. It has been fun and we have learned a lot. Our traffic has grown significantly. According to unique visitors, these are our most popular articles in 2008.

Fynanz halts p2p lending; markets student loan platform to credit unions

"To seek out funds, some students have turned to peer-to-peer lending sites, such as GreenNote and Fynanz, which focus exclusively on making college loans. After creating an online profile, users can court a variety of financiers, including friends, family, and perfect strangers. According to Kantrowitz, however, peer-to-peer lending funds are limited. 'Right now, they're just a drop in the bucket," he says. "But the idea is really interesting. In a decade, who knows what it could become?'" - BusinessWeek, December 30, 2008

Less than one week after this glowing endorsement from BusinessWeek, Fynanz has officially halted peer to peer lending due to "market conditions." They have revamped their website and are now offering financial institutions "a turn-key, web based solution that allows [them] to penetrate the growing private student loan market."

Fynanz became the first p2p lending platform focused exclusively on student loans in March 2008. Our first interview of Fynanz's founder, Chirag Chaman, was almost exactly one year ago. Fynanz quietly stopped brokering loans after Prosper received a cease and desist from the SEC about one month ago. The regulatory environment for p2p lending has caused Prosper, Zopa, Fynanz and Loanio to permanently or temporarily close their doors. Lending Club closed for several months in early 2008 and is now fully operational and registered with the SEC.

In our original interview with Chaman he said, "In a startup, I don't think there is a biggest challenge...it's only a challenge until you learn or come up with a creative way to overcome it, and 99% of the time you do." Chaman's approach to overcome the regulatory challenges appears to be to market their platform to credit unions.

Update (1/5): I received the following comments from Fynanz founder and president Chirag Chaman:

We're alive, well, and still servicing the existing loans that have been made by our current lenders. However, we have suspended accepting new borrowers and lenders. The primary reason for this is market conditions.

As interest rates declined to their current record lows, being variable rate loans, the loans sourced on the marketplace have became less palatable for our lenders. With fewer lenders bidding, it became challenging for Fynanz to fulfill loans in a timely fashion. With student loans its imperative to get the entire loan filled by a certain date — most of the time, the student really does not have the option to re-list as not meeting the payment deadline means not being able to register for classes. Since the situation was not turning around soon, we made a call to suspend any future P2P borrowing so as not to disappoint students who were in need of financing.

However, there is good news. In the coming months, we will provide students with education loan options for the upcoming academic season — and at attractive rates. We have opened up our platform to financial institutions that wish to establish a student loan program. Traditionally, private student loans have been offered by a select number of institutions given the expertise required to create and manage a program. A lot of them (mainly the large banks) have been affected by the credit crisis and curtailed their lending. But, there are many smaller banks and credit unions that are doing just fine and would like to make private student loans -- but do not have the infrastructure to do so. Now, by leveraging our platform and expertise, these banks and credit unions can offer student loans and we live up to our goal of bringing students attractive funding options.

Fynanz improves borrower vetting

Fynanz made several improvements in the vetting process for new borrowers including the following changes:

School certification is obtained directly from a borrower’s school (or a borrower has to provide a school transcript and tuition bill) to verify enrollment, class standing, and whether the borrower is enrolled half-time or full-time.
All borrowers are required to provide valid bank account information prior to application approval. If this information is determined to be invalid, the application is rejected until it can be verified.
In most cases, Fynanz contacts personal references provided by the borrower.

Some loans that were listed prior to these changes have been canceled prior to funding until borrowers can meet these requirements. In addition, there are fewer available loans as a result of these changes. The available loans, however, are of a higher quality and much more likely to complete the funding process.

Fynanz is the first peer to peer lending company to match most bids from family and friends. They are currently running a promotion where they will give some new lenders up to 5% of the amount loaned.

Fynanz, which just launched a few months ago, has received a lot of publicity due to the current student loan crisis. Today, for example, they were featured in the U.S. News & World Report.

Prosper referral program ends

Since announcing their referral program one year ago, Prosper has grown from about 300,000 members to nearly 800,000. Under the bonus program, both the referring lender and the new lender received $25. Over the last year the program has been modified several times. In addition, the program has been extended past several deadlines. According to Brad Prescott, Prosper's Director of Marketing, existing referral links will not generate referral payments for referrals that occur after 11:59PM PST on June 30, 2008.

Those that signed up prior to June 30th will still receive the $25 bonus when they fund their first loan. Prosper is expected to announce a new referral program this month with the goal of working directly with a few dozen, quality referral partners as opposed to hundreds of partners operating under a "one size fits all" approach.

Referral programs have been used by most peer to peer lending companies to grow their user base.

Lending Club started off with a $5 referral bonus which they eventually increased to $25. Their program was halted in April 2008 when they entered their quiet period to register with the SEC. In addition, Lending Club briefly offered a 5% bonus to large lenders. It is expected that Lending Club will restore their referral program, perhaps in a different form, when they open again.
Fynanz just announced a $25 referral bonus program with a 3-5% bonus to large lenders.
Although it is not a peer to peer lending company, Revolution Money Exchange also has a $25 referral bonus program which has been very popular with our readers.

Although Prosper has announced that their referral program ended on June 30th, I received an email confirmation for a new referral generated on July 1st. This is no different than email confirmations generated prior to the end of the program and confirms a bonus will be generated if the new user becomes an active participant in the marketplace within the next 90 days. The Prosper referral page is unchanged and still allows you to invite friends with the same wording indicating a bonus will be awarded. Despite the deadline, perhaps it is not too late to sign up for the bonus. Prosper would be unwise to terminate awards until they make clear changes on their website, stop sending bonus confirmation emails and stop serving $25 bonus advertisements.

Fynanz offers huge bonus to lenders

Earlier this year, Lending Club offered an incredible offer to new users who invested more than $5,000 - they would immediately give the lender a 5% bonus. It was very popular and due to the terms of the deal many were able to earn even more than 5%. For example, one lender earned an instant 12% on his investment. Lending Club's offer has expired but there is another chance.

Under a similar program, Fynanz is offering a 5% bonus to lenders under a promotion they call their 'higher education stimulus package.' Fynanz is a new peer to peer lending company with a focus on student loans. We interviewed their CEO earlier this year and covered the launch in March.

In addition to the 5% bonus, Fynanz is rolling out a referral program where new referred lenders receive a $25 lending bonus. Both parties get the $25 bonus. These referal bonuses have been very popular with Prosper, Lending Club and Revolution Money Exchange. For example, one reader talking about RME commented, "Set my account up-no prob this morning. Set one up for my wife too-$25.00 for me--$25.00 for her and I got a $10 refer fee. Easiest $60.00 I ever made." By signing up for Fynanz using a referral link and then signing up your spouse, you have already made $75. To get the initial $25 bonus when signing up you must use a referral link such as this one:

Here is the full announcement from Fynanz:

Fynanz Higher Ed Stimulus Package

At Fynanz, we're concerned about the recent economic challenges that Americans face, and specifically, the impact they're having on students. We strongly believe that the opportunity to advance oneself through education is a core American right. As such, we're excited to provide relief with the Fynanz Higher Ed Stimulus Package.

This stimulus package won't be debated in Congress or delivered to the President for consideration. We're cutting out the bureaucracy by putting students' interests first and releasing this robust package without delay. All members of the Fynanz community should know that this package is making student lending more attractive for lenders - at NO additional cost to borrowers. Here are the details…

1. $25 Lending Bonus*

Fynanz will give registered users (whether they’re a lender or a borrower) a $25 Lending Bonus when they refer a friend who lends to at least to one borrower. Additionally, referred friends will receive a $25 Lending Bonus as well. So, spread the word – Every lender you refer earns you a Lending Bonus. Every lender you refer gets a Lending Bonus.

First become a verified Lender or Borrower. Then come back to this page to get your unique link.

2. Get 3% Lending Bonus!

Education is the most important investment a person can make. Your support encourages students to make that investment and we want to help you extend as much support as you can.

That's why we're giving lenders a Lending Bonus. When you lend $3,000 or more in the Fynanz Student Loan Marketplace, you'll receive a 3% Lending Bonus*.

PS: You don't have to do anything special. Just become a lender and lend. We're keeping track.

3. Get 5% Lending Bonus

And when you refer 5 friends that lend at least $50 each, we'll increase the 3% Lending Bonus by 2% retroactively*. That's a 5% Lending Bonus – our way of saying thank you for helping students and growing the community!

Yes! As per #1 above you also get an additional $125 Lending Bonus for referring 5 lenders...

*The Fine Print

Only registered lenders who have lent to at least one borrower in the Fynanz marketplace, and borrowers who have borrowed through the Fynanz marketplace are eligible to receive the Lending Bonus.
Lending Bonus is non-transferrable, not redeemable for cash and can only be used to bid on loans listed in the Fynanz Student Loan Marketplace. Lending Bonus will appear in your account as a separate line item. Fynanz will compute the Lending Bonus due to you at the end of each month.
Winning bids must be placed by September 15, 2008 to be eligible for Lending Bonus calculation. Lending Bonus must be used to bid on loans prior to December 31, 2008.
Lending Bonus is earned on the aggregate amount you lend across all the loans you make, provided you have lent at least $3,000 in loans between April 15, 2008 and September 15, 2008 up to a maximum of $50,000 in aggregate loans.
To get the additional 2% Lending Bonus you must refer 5 or more new lenders to Fynanz, and each must lend a minimum of $50. The additional 2% Lending Bonus will be credited retroactively to the full amount you lent from April 15, 2008 to September 15, 2008.

The first month after opening there was only one open loan request but there are now 17 students looking for help. When Fynanz launched in March their CEO told us, "We expect the momentum to pick up in early May and grow steadily through August and September," Chaman said. Fynanz is enticing new lenders in preparation for a surge in loans over the next couple of months.

Fynanz and Simple Tuition featured by Boston Globe

The Boston Globe takes a sharp look at the student loan industry and especially the peer to peer market in today's article Student loan confusion opens market niche.

In addition to Fynanz and Virgin Money, the Boston Globe talks to Kevin Walker, co-founder and chief executive of Simple Tuition, an online service that helps students compare various loan options. Simple Tuition is one of the companies we hope to talk to at FinovateStartup on the 29th.

Here's an excerpt from the Boston Globe article:

So-called peer-to-peer lending companies are also sailing into the student loan fray. Waltham-based Virgin Money (part of Richard Branson's empire) offers to formalize loans between students and their family members for $299. Fynanz Inc., a younger New York start-up, recently began doing the same thing in Massachusetts, though Fynanz allows strangers (perhaps alumni of a school) to make loans to students and earn interest - anywhere from 6 to 10 percent, depending on the borrower's credit score.

But online peer-to-peer lending is still new, and Fynanz has completed one loan since its launch in March. "We don't expect this to be mainstream anytime soon, but I do expect some of the smarter, more involved students to see this as an option," says chief executive Chirag Chaman, an alumnus of Worcester's Clark University.

"It could help a small number of students, but I don't think it's going to solve a national credit crunch," Tony Erwin says of peer-to-peer lending. Erwin is Northeastern University's director of financial aid services. "It's a fine idea, but it's not the fix," he adds.

As long as students and parents are searching for a fix, that creates openings for start-ups.

"It's a really disruptive time in the market," says Stein. "But I really view chaos in a marketplace as a great opportunity."

American Banker: Fynanz Seeks to Fill Void in Student Lending

American Banker has featured the new p2p student loan lender Fynanz in a recent article (login required). Here are the highlights:

...The New York company began facilitating private educational loans in two states last month and now offers them in seven states that it says account for a quarter of U.S. student loan volume.

Chirag Chaman, Fynanz's founder, said it is entering the market at the ideal time, in part because student loans are being tarred with a brush better applied to other categories of credit.

"My feeling on this is there was never a problem with the student loan asset class," Mr. Chaman said in an interview Wednesday. "The problem was somewhere else. I personally still believe that if you have good underwriting criteria, the student loan is one of the safest unsecured assets out there."...

There are some differences between his company and other P-to-P loan facilitators, which typically try to attract lenders with attractive returns. Unlike Prosper and Lending Club, which make it clear to lenders that the loans are not guaranteed, Fynanz shares some of the risk by offering to guarantee some or all the principal for every loan originated through its site.

"We have some skin in the game," he said...

Like standard student loans, Fynanz loans are not typically wiped out if the borrower files for bankruptcy protection, Mr. Chaman said...

Bobbie Britting, a senior analyst with the consumer lending practice at TowerGroup Inc., a Needham, Mass., independent research firm owned by MasterCard Inc., said there is a void in the student loan market.

"In general, the student loan industry has just been hit hard as a repercussion of the mortgage market and the tightening up and elimination of the asset-backed securities market," she said. "There's no liquidity there, and what we've seen in the last several months is a number of lenders laying off, a number of lenders suspending operations, going out of business."

This upheaval presents an opportunity for Fynanz, because even though the regular supply for student loans is drying up, people continue to go to school and there is still plenty of demand, Ms. Britting said.

"It's going to fill a void, because there are lenders closing their doors on a regular basis, and students still want to go to school," she said. "And as Americans, we want them to go to school. We want an educated society."

...

According to Mr. Chaman, in its first month Fynanz generated just over $5,000 of loans and has $25,000 in the pipeline that will be approved. Students have applied for just over $100,000 of loans, but that figure includes repeat applications for those who were not approved the first time around, he said.

There is no shortage on the supply side. Lenders have made about $350,000 available to lend. "There's enough cash to lend," he said. "The borrowers haven't come in yet."
What is striking about that imbalance in supply and demand is that Fynanz has done almost no marketing to lenders. "Once more students start to come in, we see the lender side showing up," Mr. Chaman said.

...

"You can do it now," he said. "We obviously have put aside a very small amount of cash to buy back loans. Six months ago it was a lot larger when we had a tie-up with a financial institution," which he would not name. He expects to develop another relationship eventually.

Fynanz encourages students to apply for smaller loans than they would through traditional channels, Mr. Chaman said, and to come back over the course of the year as their funds run low.

This not only makes their applications more appealing to lenders, but it also helps combat the inherent seasonality of student loans, he said.

Fynanz began offering loans in mid-March in New York and Florida. It has since expanded to include Massachusetts, New Jersey, Ohio, Georgia, and North Carolina. It plans to go nationwide, Mr. Chaman said.

It is good to know that Fynanz has another $25,000 worth of loan requests in the pipeline. Just yesterday I mentioned that there is currently only one loan available to bid on.

Fynanz says that lenders have made about $350,000 available to lend. I wonder how this figure is calculated. With two days left for bidding, Fynanz's first loan is about 50% funded. I'm sure that Fynanz won't let this request go unfunded. If they need to I bet they cover the rest of the loan.

It's good to know that the loans are protected from bankruptcy and that Fynanz is starting to expand to other states.

Related:
Fynanz off to a slow start
Fynanz becomes the first P2P student loan marketplace
Interview with founder Chirag Chaman

Fynanz off to a slow start

Dano34, an international student attending Queens College in New York, may soon become the first person to obtain a peer to peer student loan through Fynanz. Fynanz opened their doors to borrowers and lenders one month ago.

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.

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," founder Chirag Chaman said.

So far there is only one open loan request. Dano34 is requesting $2,750 to help pay tuition and purchase a used laptop. His brother, Maverick, is co-signing the loan and has put $150 of his own money into the loan. So far, 14 lenders have funded 54% of the loan.

Fynanz has the difficult challenge of attracting sufficient critical mass to make their loan platform viable - lenders won't sign up if there are no borrowers and borrowers won't sign up if there are no lenders.

In addition, Fynanz has the challenge of explaining their new platform to skeptical students and administrators. Ana Bak, a student and opinion editor for Texas Christian University's newspaper the TCU Daily Skiff recently called p2p lending sites "less credible." Here's an excerpt from her editorial, Person-to-Person lending practices risky.

"...there are faults within the P2P program. The assistant director of scholarships and financial aid said taking a loan with this system would be risky as it is untested.

.... First, the lenders may be giving out loans with less information about the recipients. Second, these type of programs, because they are new, may not be as trustworthy as more established lending companies.

It makes the lending system seem weak and, ultimately, less credible."

Ana Bak does not mention any specific peer to peer loan company. Prosper, the oldest online p2p marketplace, has been around for over two years and made over $133 million in loans. If that is too new for Texas Christian University then Fynanz has a huge uphill battle.

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.

Fynanz to tackle peer to peer student loan niche

Chirag Chaman left his position as CEO of KobeMail a year ago to build Fynanz, a peer to peer lending site for student loans. Fynanz describes their service as "an innovative marketplace where students can get one of the most competitive rates on private student loans. Students apply for a loan and it is funded by individual lenders – friends, family, alumni and others who believe what we believe – Education is the Best Investment!" Chaman took some time out of their aggressive schedule to talk to PLR about the service they will be launching soon.

What is your background and what inspired Fynanz?

I graduated with a double major in Mathematics and Computer Science, but was always drawn towards business and finance. I started off my career as a software engineer working for Oracle in the Bay Area, and it did not take long to realize that I would be happier on Wall Street. I moved to New York and worked for Salomon Smith Barney/Citigroup in their Investment Banking Division focusing on financial institutions. These institutions were in the business of making student loans, and my job was to securitize these loans (sell bonds to investors against them). The institutions we worked with were primarily making loans under the Federal Family Education Loan Program (FFELP). Private or alternative student loans were not very common back then. Business was always good for our group regardless of how Wall Street did. After all, nearly every student took out loans and education was only getting more and more expensive each year. Coming from a technology background, I was a little bothered by the lack of technological and procedural advancements over the years in this industry. Frankly, I don't blame the financial institutions, the schools, the federal/state agencies, or anyone else, as I believe they all have the best interest of the student at heart. There are a lot of moving parts to the Federal loan program which made this process hard to change. What did bother me a lot was when private loans became more and more prominent, there was little done to improve the process. The institutions simply rolled out the new private loan train on the "old FFELP tracks". And why not, it made it virtually free to get the process started. It might have made good business sense at that time, but it did not bring in savings to the students and today when Private loans are more and more in demand, this lack of initial investment to improve the process means students are not getting the best deal. No! I did not do anything about it back then. I caught the Internet bug in Web 1.0 days and started a venture backed company. It was not until 2006 when I saw an article about Zopa, did I start to connect the dots. So here I am, 10 years later back in the Student Loan industry.

Where did you get the name for Fynanz?

We initially called this "Project BlueNote" and starting asking students in college and recent grads who they have their student loans from. Would you believe it if I told you less than 20% actually knew who their lender was? When we asked them what razor they use or who makes their cell phone, over 90% knew the answer. We realized there was a big branding opportunity, but for it to work, we had to come up with a name that students would relate to. Hence we went back to them with a few ideas. Amongst us In the office and a few parents liked conservative names with "Education" , "Academic" or "Lending" in the name as it portrayed experience & trust, but it was nixed by students (our primary target). I can clearly remember a guy from Hunter college telling me with a look on his face as if I was an idiot - "Do you really think I'll put THAT name on my facebook?" One day a friend, who was a recent grad herself and was helping us with student surveys sent me a text referring to the company as "fynanz idea". Soon a couple more used it and it stuck! (Apparently, thumb-typing Fynanz is easier than Finance as the keys are closer)

How long have you been working on the project?

Initially we thought it would take us 6-8 months. We soon realized that putting "new train tracks" in place is not an easy task. It took us about 8 months to plan the process and understand the legalities. In late 2006 we stared the planning phase -- so just over a year.

Tell us about the team. How did you bring everyone together? And who is responsible for those cool drawings on the site?

Okay, this is by far the most important aspect about any company. Fynanz will be my third venture and looking back I can say the times it worked and the times it did not, had little to do with the idea and more to do with the people who executed the idea. I am fortunate to have a team that has known each other a few years and work extremely well together. Everyone checks their egos at the door on the way in and goes about their business. In a startup you're working 12-14 hours a day very closely with people and it not always easy. I cannot stress how important team spirit is -- A team comprised of 5 average people will out-execute 10 very bright individuals every time! Drawings may not be all original, but modified to suit our needs. The graphic design was done by the fine folks at Design'N Print.

You encourage students to exhaust all federal loan options before using your service? Do you think that will hurt business?

It depends on what our business is and what we believe in. We're in the business of making sure students get a competitive student loan and we believe that Education is the best investment! If students can't afford to go to school, they are not making this investment in themselves. So, while it may see that sending students towards Federal loans is bad for our business, it's actually good for our business over the long term. See it this way:- Federal loans reduce the overall burden for the student as their combined (Private and Federal loan) interest expense will be a lower. More students can afford to go to school and get jobs...jobs help borrowers to pay off their loans, reducing the default rate on student loans...thereby making these loans a good investment for lenders as well. More lenders means competition and a lower interest rate for the student. Similarly, Fynanz will advocate only taking out what you need right now and will be putting checks and balances in place to ensure that a student is not over-extending. Part of the reason we are in the current credit crisis is because a few mortgage lenders made it easier for borrowers to over-extend. Might have been a good short-term strategy which hurt them (and a whole lot of others) in the end.

How will Fynanz be different than Prosper, LendingClub and other P2P lending sites?

Do we need to be different? I see us all as retail stores, with a slight difference in what we have on our shelves. Our focus is just student loans -- which is a very different loan product. Our borrowers are students looking to pay their education expenses. If they wanted money to pay-off their credit card or to take a spring-break trip, we just might send them Prosper's way. However, the big difference lies in the lenders of our community. We expect the goal of our lenders not to get the maximum interest from a loan, but balance an attractive return with the satisfaction of knowing that they are building a student's future.

What have been your biggest challenges as you prepare to launch a new company?

In a startup, I don't think there is a biggest challenge. Most things will end up being a challenge and once it gets resolved you realize "Wow, that was simple to work through", and you're on to your next biggest challenge. It's only a challenge until you learn or come up with a creative way to overcome it, and 99% of the time you do. So I guess the biggest challenge has more to do with your mindset and attitude, and less to do with aptitude. That said, I think the real challenges are those that are outside your control, even if it's the simplest thing and you know the process. My biggest challenge right now is finding great Ruby on Rails engineers to join the team.

Is there anything else you would like to add?

Did I mention we're looking for Rails engineers? Oh, and a couple of business development and operations folks with student loan experience.

Update (3/21/2008): Fynanz has launched - Fynanz becomes the first P2P student loan marketplace