SoLo Funds wants to crush payday lenders
Lesa Mitchell stood in the queue at his bank as a young man and his grandmother explained his plight.
His payday loan to cover a bus pass had spiraled out of control. He needed $ 200 to get out of a financial mess.
â€œI literally wrote him a check,â€ Mitchell said, and he made her promise he would stay away from payday loans.
She has also started looking for a viable alternative to high cost short term debt that can trap consumers who have even a small financial need.
After weighing several candidates, Mitchell believes she found the answer in SoLo Funds, a project she brought to Techstars Kansas City Accelerator, which she manages as general manager.
SoLo Funds – which comes from social loans – is a peer-to-peer lending app co-founded by Travis Holoway, who grew up in Cleveland but came to Kansas City from Los Angeles. SoLo does not make loans. It connects people who need a little cash quickly with others who are willing to provide it.
â€œHe created something that no one else did,â€ Mitchell said.
SoLo Funds debuted in April, launched in part with financial support. The site is currently accepting donations from borrowers, and lenders will soon see a donation option as well.
So far, over $ 200,000 has passed through the app in the form of small peer-to-peer loans.
Holoway counts each loan as an additional burden on payday lenders. Enough loans, he thinks, will crush them.
â€œWe have already started. We are already seeing it, â€said Holoway.
He also knows there is a lot of work to be done and sees the intense three-month Techstars program as a faster route to success. SoLo signed up with nine other start-ups in this year’s Techstars program. Holoway hopes to make important connections, build his team and develop the SoLo funds on a larger scale.
Digital lending is a well-worn idea. The world of fintech is everywhere, and through more than online payday lenders.
Holoway says others missed a critical market he targeted. Few digital debt solutions will disrupt the small transactions of $ 1,000 or less that SoLo manages. Or, they miss the potential crowd of small lenders, who could be lenders today and borrowers next month.
For example, another loan company, SoFi Personal Loans, offers loans of at least $ 5,000. Marcus, a lender led by Goldman Sachs, needs you to borrow at least $ 3,500.
Many online lenders are similar to Prosper in that they pool investor money to support loans rather than entering into agreements between individuals.
Other attempts have proven that digital debt processing is not guaranteed to be successful.
On the SoLo app, borrowers sign up and say how much they want to borrow and why, perhaps emergency auto repair. The borrower says how much more he will repay and when the money will come back.
Lenders can review applications and agree to finance any loans they want.
SoLo Funds, in conjunction with a banking partner, transfers funds between accounts as borrowers and lenders must link a bank account to complete the transaction. Reimbursement is made through a scheduled payment at the agreed amount and date.
Finding lenders on SoLo was not difficult. They piled up on the app so quickly that Holoway cut back on marketing to lenders as all loan requests were received as soon as they hit the app. This left the app blank.
One of the missions of Holoway at Techstars is to reach more potential borrowers, a task more difficult than it seems.
Mitchell said word of mouth might be the best approach, and she’s already introduced Holoway to a few key people in the Kansas City area. More introductions are coming, including in schools, where Mitchell said teachers often look to payday lenders to purchase supplies beyond what schools provide.
More presentations are coming, in St. Louis, Mississippi and the Rio Grande Valley in Texas, Mitchell said, places where she has developed contacts.
SoLo Funds has other work to do.
Currently, money is flowing from lenders to borrowers on the app through a bank that has partnered with SoLo Funds. This means that transactions go through the financial system’s clearinghouse automated payment system, or ACH. It takes a few days or more if a weekend comes up.
Holoway is considering a debit card feature to address this slowdown.
The work of borrowers
Borrowers on the app have their own work to do. The first is to consider how much these loans cost.
Holoway said borrowers repay lenders and generally offer to refer a bit more. He calls it a tip, not interest. SoLo funds will not let borrowers tip more than 10%.
Tipping is a finance charge that consumers might compare to the typical costs of a payday loan.
An example that SoLo Funds offered in a video shows a woman seeking $ 265 and offering a refund of $ 285, or a tip of $ 20. Holoway said loans through SoLo funds cannot be less than seven days or more than 30, although prepayment is always available at no additional cost.
Assuming the borrower sets the loan at 14 days, a simple calculation shows that the loan carried an annualized interest rate of 197 percent. That’s about half the typical annualized interest rate on payday loans, which according to the Federal Deposit Insurance Corp. advice to banks consider similar types of personal loans.
Holoway said there are other tangible differences with the SoLo funds. So far, around 8% of loans have not been disbursed. Lenders were ready to lend a hand for a while at no cost.
Lenders have also been willing to forgo loans in some cases when the expected automatic repayment has essentially rebounded. Unpaid lenders can also send the debt for collection.
Another difference highlighted by Holoway is that SoLo Funds works with an alternative collection company that replaces repeat phone calls for payment with emails and texts much less frequently.
SoLo Funds go beyond traditional measures of creditworthiness to take into account other factors to create what they call a â€œsocial credit ratingâ€.
It’s an extension of Holoway’s idea of â€‹â€‹letting borrowers and lenders set their terms away from an industry that has had a lot of problems. Kansas City has been a hotbed of illegal payday loan activity.
Kansas City-area businessmen and brothers, Joel and Scott Tucker, have become targets of federal action for their payday lending activities.
Scott Tucker was ordered to pay the Federal Trade Commission nearly $ 1.3 billion in a civil case against him and was sentenced to more than 16 years in prison in connection with his illegal payday loan operation 2 billions of dollars. Joel Tucker was hit with a $ 4 million judgment in favor of the FTC and now faces criminal charges on 15 counts of felony amid allegations he lied to a bankruptcy judge.
The Kansas City payday loan industry has also produced the Kansas City company bankrupted that funded payday lenders, indictments against two native american tribes, a $ 613 million penalty against the American bank, jail of another Kansas City payday lender, a controversial decision by the Consumer Financial Protection Bureau and an episode of Netflix’s “Dirty Money” series.
SoLo Funds, however, wants to supplant even legal payday lenders. Holoway’s hope is that borrowers on the app become lenders and get out of those short-term debts and into the mainstream.
The SoLo app includes financial literacy lessons on topics ranging from basic ideas, such as emergency savings and credit cards, to longer goals for retirement and education.
Through its methods, SoLo Funds hopes to become a lead generator for banks, providing them with clients ready to manage mortgages, auto loans and other beneficial loans.
“It’s the end of the game for us,” said Holoway.