Borrowing money from friends and family can be a messy process, leading to tense relations and awkward group gatherings, but a new lending platform developed by a Durham entrepreneur is seeking to streamline and formalize the process.
Founded by Bernard Worthy and Justin Straight, Loanable is a website that helps people fund within their networks and repay on a monthly auto draft, designed to lower the default rate for friends and family loans. Millennials especially utilize these kinds of loans, often to pay back student loan debt, Worthy said.
“There’s $1.3 trillion in student debt in U.S. that affects 44 million Americans,” Worthy said. “Many are delaying life’s major events, and we thought, what if you could save thousands on a lower interest rate on friends and family loans?”
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He noted that Loanable can help millennials refinance their student debt, freeing up money for them to accelerate the life goals they might be putting off like starting a family or buying a house. In addition, Loanable strives to create cycles of investment for small communities, especially to increase economic opportunities for minority populations, Worthy said.
He explained that friends and family loans often have unclear terms or can change over time, leaving both parties confused about how often repayments will occur and how much they will be. This leads to a 50 percent default rate on friends and family loans.
“When you don’t have a solid document, you don’t have anything as backing to that agreement,” he said. “By formalizing and clarifying the terms through a document that both parties can negotiate back and forth, we think we have a unique process.”
Users can create accounts on the Loanable website to begin drawing up a loan agreement based on the rates they desire. A repayment calculator tool helps them test out different interest rates and terms.
“The customer may never have heard of these things before, so we give you this calculator and educate you a little bit about what current markets may be,” Worthy said.
How it works
The site allows people to split up the total amount of money they’re looking to raise into smaller amounts, creating a crowdlending opportunity. Users can invite friends or family members to sign onto the agreement by sending out a personalized email with a welcome video, which also serves as identity verification. Both parties then negotiate the terms and sign a final document.
Loanable sets up the repayment process by connecting to the lenders’ and borrowers’ bank accounts through a third-party processor and moving the money on a monthly basis, so you never have to worry about keeping up with it.
Worthy noted that Loanable does not store users’ bank account information, only their emails and details from the loan agreement in secure databases that use high-level encryption through Amazon. They partner with the online payment system Dwolla, which is also used by U.S. federal agencies, to actually transfer funds.
Loanable generates revenue by charging a fee on the loan agreement itself – single loan pricing is $29.99 or you can choose the bulk pricing option of 20 loans for $99. There’s also an annual service charge fee of $5, but Loanable doesn’t make money based on the size of the actual loan.
Similar platforms for friends and family loans have sprung up in the past few years. Puddle establishes a “money pot” among communities, allowing users to put money into a digital pool and then take out as much as five times that amount when they need it. The app Ledge works like a crowdfunding campaign, letting users post their desired amount of money on social networks like Facebook and Twitter. Borrowers can designate their own interest rate and when they will pay back lenders.
David Beck, policy and media director at the Self-Help Credit Union in Durham, said that people often turn to friends and family loans to get out of debt or pay off another loan.
“People are maybe in some financial difficulty and are trying to get out of it by relying on friends and family,” he said.
Beck cautioned that these loans could potentially create uncomfortable situations if something doesn’t work out, leading to more emotional impact than working with a financial institution.
“That said, if both parties are comfortable with it, it can be a real help for people to get out of trouble or expand their small business,” he said.
These platforms are often appealing because they allow users to avoid the high interest rates of many traditional loans.
Worthy explained that he got the idea for Loanable while trying to enroll in the Iron Yard code school in Durham. His only financing option ended up being a high-interest student loan that he’s been paying off for three years now.
From idea to Google win
He began thinking about developing a startup that could use crowdfunding to increase students’ access to code school, especially students of color. While on his way to a retreat for Christians in business with Justin Straight two years ago, Worthy brought up his ideas and Straight suggested a platform for loans.
“It’s hard to get donations, so we moved to loans and found this much bigger space,” Worthy said.
They began researching SEC compliance regulations and how to create loan agreement documents, with the help of legal advisers. Worthy, who graduated from the University of North Carolina at Chapel Hill with a business degree, has background in technology through the Iron Yard, while Straight had worked in micro-finance, giving him knowledge of local community financing needs. The two thought that their idea could decrease default rates by creating a clear, formalized process for loans that also allows the ability for negotiations.
Loanable made it to the semi-finals of the NC IDEA seed grant program, which provides funding and grants to startup companies, and was a participant in the recent Google for Entrepreneurs (GFE) Exchange Program for Black Founders hosted by American Underground in Durham. The startup was one of 10 teams selected from 110 applications and the sole Triangle company in the program.
“It’s just been such a great inspiration for us,” Worthy said. “It’s great to see other startups giving us advice for our stage and our products, and to have the Google name behind us is just fantastic.”
He noted that the program provided them with advising on their sales pitch and digital advertising, in addition to connecting them with potential investors. Several advisers they met will continue working with them as they go forward with Loanable.
Loanable just launched its website this week after a beta test with about 50 users. Worthy noted that 90 percent said they would pay for the service and that they already have two paying users.
At the moment, just Worthy and Straight run the startup, with help from about six advisers who assist with technology as well as advertising and navigating legal regulations.
A personal goal for Worthy is to help underrepresented people have greater ability to acquire capital, leading to better education and job opportunities.
“Our mission is to create a world where everyone has access to capital from within their network,” Worthy said.
Another focus is keeping capital within communities, creating a virtuous cycle of wealth that leads to access and empowerment, he noted.
Moving forward, Worthy plans to apply for more funding grants and conduct research on the best ways to attract customers.
“It’s a very emotional experience, borrowing from friends and family,” he said. “We’re working on how to capture that well.”