Peer-to-Peer Lending Is Now an Alternative to Payday Loans

• Author: Kelly Cooke
• Posted: 2024-10-18

Many Americans are unfamiliar with the world of microfinance. Those who know about it are aware that it is generally used for altruistic people to provide small loans to people in Third World countries who want to launch businesses of their own. Now, Americans have the ability to access microfinance when they are strapped for cash. While this is a nascent market, there is some hope that it may provide an alternative to the usurious payday loans that prey upon desperate Americans. This form of assistance for people can greatly help if they can access it during COVID-19.

SoLo Funds Allows People to Obtain Small Amounts of Credit

A new company called SoLo Funds allows generous people to try to help others who are in need. They have provided a platform for individual people to lend directly to their peers who are struggling to make their rent and put food on the table. This can be a short-term source of cash for people who are otherwise desperate and tempted to turn to a payday lender. The mission of the company is to help people who live from paycheck-to-paycheck and encounter bumps in the road. It is these unplanned expenses that start the vicious cycle of debt that leads people down the road to bankruptcy.

The microlending platform that is hosting these loans was actually introduced roughly two years ago. However, it did not previously allow peer-to-peer lending. Recently, in order to meet the challenges of the pandemic era, the founder of the company repurposed and changed the platform to facilitate direct lending.

The loans made on this platform are interest-free. Borrowers have some element of control over their lending because they lead first by stating the terms under which they would borrow. They enter into the system how much money they need and when they will be able to repay it. Borrowers will also need to state the reason why they need to take out the loan.

Lenders are not uncompensated for the capital that they provide. Borrowers have the ability to tip the lender for providing the capital. This is optional, but borrowers do need to state ahead of time what they are willing to provide as a tip. The platform limits the amount of tip to 10% of the total amount lent.

The loans are generally between 15-30 days. In other words, they are short-term vehicles at slightly better rates than payday loans with better terms than a predatory payday lender would offer. Some borrowers are able to obtain small credit with less than the maximum 10% tip. In fact, the average tip on the site is 8%.

The borrower does have the option of extending the term of the loan for an additional two weeks if they are unable to repay it by the due date. However, they would need to pay an extra 5% for this grace period. If the borrower is still unable to repay the amount by this time, the lender has two options. They can either write the loan off and give it as a gift to the borrower. Or, they can send the account to collections. The collections agency will try for a month to recover the debt and gets to keep 30% of whatever they recover.

SoLo Now Backs Some of the Loans on its Platform

For lenders, some loans are backed by SoLo as they guarantee some of the credit. However, many lenders do take a risk that the borrower will default. As a lender, you would need a lower rate of default because, if a certain amount of borrowers default, the lender could end up losing money since the defaults would not adequately be offset by the tips. However, SoLo tries to give their lenders as much information as possible on the borrower by giving them a score that best estimates their creditworthiness. SoLo claims that its own metrics that it uses do a more effective job of estimated default risk than FICO score models.

Borrowers stand to benefit the most from this platform. Any alternative to high-priced payday loans should be explored so that borrowers do not enter the debt spiral. They should at least explore the platform to see if smaller amounts of capital are available to them. Given the oppressive nature of payday loans, they have nothing to lose by giving SoLo a look to see if it is a viable source of financing.