New Peer-to-Peer Student Loan Site Launches
Posted 15 May, 2008
It looks like everyone is trying to get a piece of the student-loan pie these days-even the investing public. A new peer-to-peer (also known as “P2P”) lending site called Fynanz is now offering students the opportunity to borrow from individuals instead of from companies-but is this a safe (or practical) move?
How it Works
The basic idea behind peer-to-peer student loan lending is as follows:
- The student creates a “loan listing” describing him/herself, the amount of the loan they need, and the
highest interest rate they will pay.
- Lenders (remember, these are just regular people, not banks!) or Fynanz “bid” for the loan, offering the lowest interest rate they would accept.
- A bidder “wins” and the student is mailed a check for the loan amount.
- Student pays back loan (Fynanz claims they can wait until after graduation to begin payment).
(Remember, you should always thoroughly read through lending documents before borrowing, even if you see it summarized elsewhere.)
Rates & Fees
The site is currently in a “limited launch period”-basically a trial run-and therefore is offering loans only in a few select states. Their fees, and min/max loan amounts vary by state, while their interest rates vary by the student’s score in their proprietary “FACS grade” system (which relates to the risk of default). Both borrowers and lenders are charged fees for Fynanz transactions.
Good, Bad, or Ugly?
The seductive offer of potential lower interest rates may initially make this social-networking version of student loan borrowing a bit tempting, but be wary of trusting such a young system too soon. Here are a few things you need to know about peer-to-peer lending:
- This is a Private Loan. Peer-to-peer loans are private loans. That means they are not affiliated at all with federal loans, and therefore do not have the consumer protections that federal loans offer. They may also have higher rates than federal loans.
.
- You May Have Better Options for Inter-family Loans. Fynanz encourages students to have “friends and family” bid to be their lenders, but if you choose to borrow from a relative or friend, it probably isn’t the best method to do so. We offer our clients specific recommendations about how to lend to or borrow from family or friends most effectively.
.
- Guarantee Risks for Lenders. Fynanz sets its guarantee based on the FACS grade of the borrower, which means that if the student defaults on the loan, the lender may only be guaranteed 50% of the amount they lent. (Read more here.)
At this point, I would not recommend this type of loan to students. The student loan market is changing, but as always, it is crucial that your student attain the best possible loan terms-and federal loans continue to offer the most consumer protections. You can read this post for more information on Private v. Federal Loans.
All the best,
Deborah Fox
Deborah Fox is the founder of Fox College Funding, a nationwide company that helps families find creative ways to reduce their college costs.
photo: .| Network |. by clix
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It looks like everyone is trying to get a piece of the student-loan pie these days-even the investing public. A new peer-to-peer (also known as “P2P”) lending site called Fynanz is now offering students the opportunity to borrow from individuals instead of from companies-but is this a safe (or practical) move?
How it Works
The basic idea behind peer-to-peer student loan lending is as follows:
- The student creates a “loan listing” describing him/herself, the amount of the loan they need, and the highest interest rate they will pay.
- Lenders (remember, these are just regular people, not banks!) or Fynanz “bid” for the loan, offering the lowest interest rate they would accept.
- A bidder “wins” and the student is mailed a check for the loan amount.
- Student pays back loan (Fynanz claims they can wait until after graduation to begin payment).
(Remember, you should always thoroughly read through lending documents before borrowing, even if you see it summarized elsewhere.)
Rates & Fees
The site is currently in a “limited launch period”-basically a trial run-and therefore is offering loans only in a few select states. Their fees, and min/max loan amounts vary by state, while their interest rates vary by the student’s score in their proprietary “FACS grade” system (which relates to the risk of default). Both borrowers and lenders are charged fees for Fynanz transactions.
Good, Bad, or Ugly?
The seductive offer of potential lower interest rates may initially make this social-networking version of student loan borrowing a bit tempting, but be wary of trusting such a young system too soon. Here are a few things you need to know about peer-to-peer lending:
- This is a Private Loan. Peer-to-peer loans are private loans. That means they are not affiliated at all with federal loans, and therefore do not have the consumer protections that federal loans offer. They may also have higher rates than federal loans.
. - You May Have Better Options for Inter-family Loans. Fynanz encourages students to have “friends and family” bid to be their lenders, but if you choose to borrow from a relative or friend, it probably isn’t the best method to do so. We offer our clients specific recommendations about how to lend to or borrow from family or friends most effectively.
. - Guarantee Risks for Lenders. Fynanz sets its guarantee based on the FACS grade of the borrower, which means that if the student defaults on the loan, the lender may only be guaranteed 50% of the amount they lent. (Read more here.)
At this point, I would not recommend this type of loan to students. The student loan market is changing, but as always, it is crucial that your student attain the best possible loan terms-and federal loans continue to offer the most consumer protections. You can read this post for more information on Private v. Federal Loans.
All the best,
Deborah Fox
Deborah Fox is the founder of Fox College Funding, a nationwide company that helps families find creative ways to reduce their college costs.
photo: .| Network |. by clix
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Deborah, you’re absolutely right that student should consider Federal loan. But as Federal loans have caps, most students take a private loan AFTER they have exhausted Federal loans. Looking at Fynanz’s site, it says it right there on the students page to only take a loan after exhausting federal options.
Deboarh,
You may be missing the point. I believe Fynanz is positioning itself as an alternative to other private loans, not the federal program.
Adam