Short-term loans hold promise as a lifeline for consumers
As the pandemic persists and individuals and families experience cash shortages and job losses, exposure to unforeseen expenses can reach critical levels. As PYMNTS research has shown, about 60 percent of Americans live paycheck for paycheck. And the statistics of Federal Reserve show that even before the coronavirus devastated household finances, that on average 40% of Americans had less than $400 in hand to cover emergencies.
For these consumers, short-term loans can be a lifeline. As Travis Holoway, co-founder and CEO of SoLo FundAmericans struggling with cash shortages and needing funds to cover basic necessities, told PYMNTS, could benefit from a peer-to-peer mobile market that can help bolster their long-term creditworthiness.
The solution is viable due to the relatively small amount that this segment of consumers may need to borrow. The low dollar space, Holoway said, had so far had limited options for potential borrowers confined to friends and family (which can be stressful for personal relationships) or predatory lenders who may charge fees. hundreds of percentage points in annual interest rates. . Lenders have relied on traditional methods of underwriting and sources of capital, Holoway said, resulting in friction throughout the process. These charges, he said, “have resulted in restrictions in the credit market and increased costs of capital for loan companies.”
At a high level, and to address these issues, the SoLo Loan Exchange creates an online community where members can apply for and receive short term loans.
The company said that since its launch in 2018, it has processed more than 100,000 loans from 300,000 users. Beyond FICO, he said, and beyond short-term lending models, a better indicator of creditworthiness, even in times of job insecurity, he said, is the cash flow. For example, the person who is laid off from a full-time position at Macy’s, who delivers for Postmates on the side, or who can use their talents and skills to design and sell personalized coffee mugs on Etsy, he said, can have enough cash. contract and satisfy small loans. The lack of a dedicated biweekly paycheck – which would prevent traditional payday lenders, who guarantee, part of a borrower’s upcoming payroll cycle, or even some digital-first online lenders – shouldn’t not exclude people from the credit markets.
SoLo, he said, is looking to offer an online platform that brings together lenders – people who want to make a positive impact (Holoway said they want to ‘do well while doing good’) – with people who want short term loans, where the average loan size is $ 200 and the average term is 15 days.
The rapid tenure of these loans, he said, allows lenders to earn returns faster and then redeploy the capital to other borrowers – sometimes several times a month.
“Individuals with as little as $ 50 can deploy capital to someone else,” Holoway said.
The on-demand capital nature of the model, he said, works when borrowers go online and create profiles. They ask for an amount and terms they want for the loans, including the repayment date and the reason for the loan (for example, to cover food or rent). Lenders can browse loan applications, select loans to fund, and funnel money on the platform.
There are no minimum dollar requirements for loans, Holoway told PYMNTS, and transparency is high as borrowers and lenders log in directly, with only the platform as the “middleman.” Borrowers and lenders undergo AML and KYC checks when providing bank account information, Holoway said.
The company also offers a “Solo Score” which is a transaction-by-transaction reading of a lender’s confidence in their repayment capacity based on borrowers’ cash flows.
“We are looking at an individual’s ability to repay a loan at a specified date and time. So if a borrower applies for a loan and has a repayment date of the 20th, we look at how often are they paid? When the big bills come out, what are their overall spending habits? What is their average daily account balance? “
The additional data points include behavioral data, location data, and social media data to help SoLo better assess an individual’s creditworthiness, Holoway said.
SoLo raised $ 10 million in a Series A funding round from a consortium of investors led by ACME Capital. Holoway said the funding would be used to build and grow her team and increase brand awareness.
“We believe that the data we have is extremely valuable to our users in terms of providing them with a path to superior financial mobility” as they move forward in life and, for example, seek out credit cards. credit or large loans (eg auto loans) with more advantageous interest rates because they are able to demonstrate their creditworthiness.
“Because loans are so short term, we get data so quickly that it essentially allows us to update our model and be able to learn more about loan performance much faster than traditional loan companies that may not know full loan performance for 12, 24 hours. or 36 months, ”Holoway said. He said there is a 30% “overlap” for people who are both a borrower and a lender on the platform.
“Borrowers are going through this tough time, but at the end of the day they come back as a lender or evolve into a lender and pay that forward,” he told PYMNTS.