Though other online person-to-person loan facilitators have claimed to be open to subprime borrowers, the start-up Loanio Inc. has gone an extra step by offering tools that cater specifically to them.
The Nanuet, N.Y., company launched its site Wednesday with the intention of attracting the business of borrowers with poor or nonexistent credit histories. Such borrowers can offer other financial records, such as tax returns, to prove their ability to repay loans and also can use a co-signer with better credit to reassure potential lenders.
"There seemed to be this really big hole for an underserved market," said Michael Solomon, Loanio's founder and chief executive. Though this market might be underserved for a reason, Mr. Solomon said the co-signing system addresses that concern head-on.
"What's happening is, the lender is not betting on the borrower," he said. "They're betting on the co-borrower."
If a borrower stops making payments, Loanio plans to start debiting the bank account of the co-signer until the loan is current; the company says it gets all the information it needs during the loan-application process.
Mr. Solomon is a lawyer and founder of Omnilaw Legal Plans Inc., which offers legal and financial services such as drawing up promissory notes for loans. He said the company must work within laws and regulations that vary by state; Loanio is active in 22 states.
Its business model resembles that of rivals such as Prosper Marketplace Inc., the oldest peer-to-peer lender in the United States. Prospective borrowers put up a listing, and lenders collectively bid on pieces of it until enough have signed on for the loan to be funded; a single lender can also choose to fund the entire loan.
Considering the economy's distress, Mr. Solomon said, "The question really remains as to whether or not this is the … best of times to launch this type of a site or the worst of times to launch it, and I believe it's the best of times. There's still enough money out there and people that believe in what we're doing."
He acknowledged that individual lenders might be just as cautious as financial institutions are about how to invest their money. "Even if we had to weather the storm until things started turning around, we're in at the right time," he said. "We'll grow it slowly if we need to and be there when the market is ready."
In its first 24 hours, 600 people have signed up for Loanio accounts, of whom about 100 are lenders. There is a handful of listings so far, and since it takes about four business days for a lender to move money to a Loanio account for bidding on and funding loans, no loan has been bid on or funded yet.
Some sites, such as Lending Club Corp., have branded themselves as sites for prime borrowers, but others have tried to be open to a riskier category of prospects. Prosper Marketplace originally allowed even risky borrowers to make their pitch on its site, but it cut them off last year.
Today, borrowers on Prosper's site must have an Experian Scorex Plus rating of at least 520, though lending is open to anyone. When Prosper made that change, it said that borrowers with low or no credit scores accounted for 45% of its listings but just 8% of its loan volume. This showed the company that lenders were not interested in these borrowers, it said.
Other P-to-P lending sites, such as GreenNote Inc. and Fynanz Inc., have focused on students who have little or no credit histories. GreenNote urges students to look to their own social network for prospective lenders; Fynanz focuses on attracting loans from strangers but offers academic performance data and some guarantees on the principal amounts of its loans to address lenders' concerns.
Lenders have already begun to grill the few borrowers with listings on Loanio about issues such as why essentials like utility bills are not listed among the person's monthly expenses.
Edward Woods, a senior analyst for the market research firm Celent, which is the financial research arm of Marsh & McLennan Cos. Inc.'s Oliver Wyman consulting unit, said it would be hard to make loans appealing to individuals when they are not appealing to banks but that Loanio's method of allowing a co-signer makes sense.
In a way, the unpleasantness of the current economic situation makes these loans more likely to get funded, he said, because more people are in unusual circumstances that can ruin credit even if they are otherwise creditworthy.
"There are going to be more people that have extraordinary circumstances," he said. "This is the hardest time to get funds, and having a vehicle like this is a good thing."
Bobbie Britting, a research director in the consumer lending practice at TowerGroup Inc., an independent research firm owned by MasterCard Inc., said that, since Loanio requires a co-signer for some loans, "that doesn't make them a lot different from what a traditional lender would do."
In that way Loanio is not so much offering an alternative to people with poor credit, she said, as "just becoming another channel, really."
That said, the service may appeal to individual lenders who lack investment options. "People just don't know where to put their money these days," she said.