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Note: Loanable has recently changed its name to LoanWell.
The Internet has made many innovations possible in the financial arena, including the advent of online crowdfunding. Donation crowdfunding was the first to take off, with sites like Kickstarter, Indiegogo, and LoanGifting providing an opportunity for individuals to contribute to worthy projects and causes. In return the donator receives a token thank-you, like a t-shirt or CD, or the first line of the produced product.
Simultaneously, peer-to-peer (P2P) lending, an alternative to bank lending, became available with the rise of Lending Club and Prosper. In P2P lending, one-to-one loans are mediated by a platform that handles all the details. The JOBS Act of 2012 eventually led to business crowdfunding sites, (formerly, Title III Funding Portals, such as MicroVentures and Wefunder) in which individual investors can either invest equity in, or lend money to, small businesses seeking capital.
In business crowdfunding, investors accept stock shares (equity crowdfunding) or debt notes (debt crowdlending) in exchange for cash in the hope of receiving a return on investment or repayment of the debt with interest.
What is Loanable?
Loanable.io is a new portal that combines the best ideas of crowdlending and P2P lending into a novel idea: Friends and Family Crowdlending (FFC). The Loanable lending platform is the brainchild of two founders, Bernard Worthy and Justin Straight. They created it as a way to formalize the lending process that many folks rely upon when they ask friends and family for loans. Their initial impetus was to give students and graduates a way to refinance high-interest student debt through a network composed of family and friends, although there is no restriction for the purpose of borrowing on Loanable.
The Loanable Way
The idea is straightforward: Create an FFC network on Loanable, draw up loan agreements with the rates and terms, and have a third-party agent, Dwolla, transfer repayments monthly from the borrower’s account to the lenders. For example, if you want to raise $10,000 from your 20 closest friends and family members, you could use Loanable to create a $500 loan agreement for each of the 20 folks on your network.
The process is simple – just fill in a short form with the following information:
- Borrower’s name, address, and email
- Lender’s name, address, and email
- Loan amount
- Interest rate (typically 2 to 10 percent for FFL loans)
- Term (typically 36 months)
- Late fee (typically $25)
- Start date (borrower begins repayment within 30 days of this date)
- End date
The website provides a handy calculator to help finalize the terms. In about 10 minutes, you have a legal loan agreement ready to go.
The next step is to use Loanable’s templates to create a set of personalized invitation emails for the members of your FFC network. The pitch might be something like “Would you be willing to loan me $500 with 19 other people so I can raise $10,000 to refinance my student debt?” Loanable sends the emails and a welcoming video on your behalf to the members of your FFC network. The parties then negotiate final terms and sign the (revised) loan agreement.
Loanable then works with Dwolla to set up the automatic funds transfers with each lender who accepts your invitation. All the private account information is maintained by Dwolla, not Loanable. The other information, including the final loan agreement, is stored by Loanable on an encrypted Amazon database. Dwolla executes the money transfers as per the loan agreement.
The formal loan agreement provides lenders with a document that can be used in dispute resolution, should that become necessary. That’s important because undocumented friends and family loans typically have a default rate of 50 percent, according to founder Worthy.
Costs and Benefits
Loanable offers four annual plans to suit your needs. Each plan includes legal loan agreements, editing by borrower and lender, an e-signing process, and auto-drafted repayment.
- Single: $14.99/year pays for one loan
- Starter: $49.99/year pays for up to 20 loans
- Fundraiser: $74.99/year pays for up to 50 loans
- Pro: $149.99/year pays for unlimited loans
In addition, Loanable charges an annual service fee of $5. Notice that the costs are independent of the loan amount.
Benefits to Borrowers
Borrowers benefit from Loanable in several ways:
It can be a humbling experience to ask your family and friends for a loan, and misunderstandings can ruin relationships. Loanable’s formal mechanisms (i.e., loan agreements, bank transfers) add legitimacy to the process. The process spares the borrower any indignities associated with personally going hat-in-hand to friends and family members.
Access to Credit
The process does not involve credit scores, credit histories, or credit bureaus. It therefore gives people a way to borrow money, whatever their past financial history.
Low Interest Rates
FFL lenders are typically more willing to lend at a low rate, saving the borrower hundreds or thousands in interest payments.
The fees charged by Loanable are exceptionally low and do not increase with the size of the loan.
Benefits to Lenders
Legal Loan Agreement
A borrower can sue, if necessary, based upon the terms in the Loanable legal loan agreement.
Dwolla automatically transfers repayments of principal and interest each month, without any effort on the lender’s behalf.
Gives families and friends an opportunity to earn some interest and help out a needy borrower with a relatively small loan, knowing that other lenders are taking the same risk.
Student Loan Refinancing
The founders pitch Loanable as a way for people to refinance student loans. This is generally a good idea if you have private student loans and you are able to refinance at a lower interest rate. Consolidating student loans together helps you simplify your monthly payments, and it could save money if done right. It sounds enticing, but only the most qualified applicants can be approved for a worthwhile refinance loan – one that can actually save money.
Refinancing can be used to lower your interest rate, spread out your payments over a longer term, or both. As a refinance, you are borrowing less now than you did originally, because presumably you’ve already paid down some principal. This means you immediately lower your monthly payments, even if you get the same terms, because less is financed.
It makes sense to use a service like Loanable if you meet certain criteria:
- You have several family members and friends willing to lend to you
- Your student loan debt isn’t too high (the higher the debt, the harder it is to raise the money via crowdlending)
- You can get a lower interest rate via Loanable
- You might be consolidating multiple loans
- You might have a poor or scant credit
On the other hand, you might prefer to use a student loan company to refinance private student loans, as many offer low rates and will refinance or consolidate much higher sums. Many even offer no-fee refinancing and a choice between fixed- and variable-rate loans, with terms up to 20 years.
Author: Jeff Gitlen