REDWOOD CITY, Calif. - The ongoing growth of peer-to-peer lending, which cuts out middlemen such as CUs, has now spread to student loans.
Some credit unions have tempered the threat from one of the largest peer-to-peer lenders, Zopa, by pairing up with the online lender. But now a new player is emerging called GreenNote that focuses exclusively on college loans–allowing individuals, financial institutions and all sorts of different groups to lend as little as $100 to the students of their choice.
That’s similar to how Zopa, and other so-called P2P lenders such as Prosper, operate, by allowing individuals to ask for loans for a number of reasons. Their respective sites feature profiles of people looking to pay off their credit cards, expand their businesses or simply pay for day-to-day expenses while they take classes.
“The others are more generic and they are taking a more horizontal approach,” GreenNote CEO Akash Agarwal told CU Journal, noting that college students require a specialized focus. “We’re not a marketplace; the loans don’t get bid up. You can’t just put a student up on a site and have people bid on the loans because their credit is somewhat weaker than others.”
For now, GreenNote’s network of lenders is comprised solely of individuals, mostly family and friends of students, as it has not paired with any financial institutions. Initially, when U.K.-based Zopa entered the U.S. market, it did not plan to partner with any financials, but U.S. regulations finally led it to partner with a half-dozen credit unions to back its loans.
Despite a strong similarity to the credit union mantra–Agarwal said he wants to facilitate the process of “people helping people”–the GreenNote CEO did not embrace or dismiss the idea partnering with lenders and educational institutions, adding that he does not see himself in competition with CUs in a “very big market.”
“You can never say never – we are open to new ideas,” Agarwal said. “You don’t know what is going to happen next. The educational institutions themselves may have people who want to invest. Some have expressed some interest.”
CUs have struggled to cultivate the youth market at the same time that same market has helped fuel the growth of P2P lending. The organic growth of this market is what draws Agarwal and GreenNote into the picture. “This phenomenon is already happening, we’re just trying to leverage that,” he said.
As is the case with most peer-to-peer lenders, GreenNote makes its money by collecting an up-front documentation fee from the students seeking loans. Students have a responsibility to contact people and ask for funds through GreenNote’s interactive website, though the company does encourage them to stay in touch with every lender as investors have the option to forgive interest or even the whole payment.
GreenNote differs from some of its competitors in that it is not regulated and the loans are not guaranteed. The company does not actually do any of the lending; it simply structures the investments by other individuals and creates a promissory note for students. “We’re not a lender, we’re just helping facilitate this process,” said Argarwal.
Even with his firm’s fairly low interest rate, Agarwal actually encourages students to pursue grants and federal loans before seeking out his company’s services.
Participating students do not have to have established credit, a co-signer or even show proof of citizenship to obtain loans, which are fixed at 6.8%. That rate is very competitive in the peer-lending marketplace, as Zopa’s rate structure starts at 8.49% and Prosper’s begin at 7.68%. Borrowers with Zopa do have the ability to receive help on their interest, up to the point where they may actually pay back less than they owe, but only a handful of participants have done so.(c) 2008 The Credit Union Journal and SourceMedia, Inc. All Rights Reserved.http://www.cujournal.com http://www.sourcemedia.com
