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SALT LAKE CITY — If you’ve applied for a loan recently, then you know how tough banks’ lending criteria have become. Unless you meet a very specific set of guidelines, your application will likely be declined. And if you are approved, you will pay a higher interest rate than you deserve. Even though you’ve done a good job of making payments on a timely basis, the bank will use your loan as an opportunity to subsidize its losses on people who aren’t as financially responsible.
In this lending environment, what other options are out there? Not many.
Some people who have been declined by the banks have turned to high-interest credit cards to manage their debt. United States residents carried $850 billion in credit card debt by the middle of 2013 and are paying an average interest rate of 15 percent annually. Since most of these people are only making the minimum payments, it’s difficult to reduce debt in a timely and meaningful way.
Other borrowers are turning to payday lenders to address their immediate debt needs. In fact, 8 percent of the nation’s working population has secured a payday loan. But payday lenders are charging excessive interest rates that often exceed 400 percent. That’s not a typo — payday loan interest rates are well into the triple digits.
In recent years, enterprising entrepreneurs and nonprofits have found a new way to bypass the banks and fund their initiatives — crowdsourcing. Using their social media connections and the online community, people looking for money to fund a film production, a community project or to raise venture capital for a small business can make their plea on a variety of websites and a multitude of investors or donors may contribute to the project to help it reach its monetary goal.
The great thing about crowdsourcing is that entrepreneurs can enlist several of their supporters to fund a portion of the goal until the combined investments total the full amount. No single investor is taking on all of the debt or all of the risk.
United States residents carried $850 billion in credit card debt by the middle of 2013 and are paying an average interest rate of 15 percent annually.
Crowdsourcing has turned into a viable option for the business community so just think about the possibilities for applying this concept to personal lending. That’s just what CreditCircle, a Salt Lake City-based lending company, has done. At the end of 2013, CreditCircle introduced Sponsored Loans, a lending option that is changing the traditional lending model.
Here’s how Sponsored Loans work: as with crowdsourcing, borrowers can enlist members of their social circles such as parents, relatives, siblings, friends, neighbors, co-workers, or old college flames, to back the loan. These individuals are referred to as sponsors.
Sponsors serve two very important roles in this process. First, they help determine whether or not the borrower is likely to repay the loan. Since sponsors are on the hook for the debt if it’s not repaid, they will probably only step in if they firmly believe the borrower is going to repay the loan. After all, would you sponsor a loan for someone if you did not think they would pay it back?
Sponsors also impact the interest rate. Borrowers can receive much lower interest rates based on the good financial habits of their Sponsors. That means the borrower can reduce debt at a faster pace.
So how is serving as a loan sponsor any different than cosigning for a bank loan? First, sponsors are paid a fee to take on the borrower’s risk. Second, Sponsored Loans build on the crowdsourcing concept by allowing multiple sponsors to support the loan. Third, a Sponsored Loan will not affect the sponsor’s credit rating or capacity unless they themselves default on their obligation. Try getting this kind of deal from the bank when asked to cosign for a loan.
Everybody needs a little financial assistance once in a while and all most people want is a fair opportunity at a reasonable interest rate. Through its application of crowdsourcing concepts to personal lending, Sponsored Loans provide a reasonable lending option for borrowers who are fed up with the current lending landscape.
David Shimko is a co-founder and CEO of CreditCircle, a Salt Lake City-based lending company. For more information about CreditCircle and its Sponsored Loans, please visit www.creditcircle.com.