A new lending startup called Vouch has been getting a lot of buzz for the unique way it vets potential borrowers. Rather than focusing solely on traditional criteria like FICO scores, debt levels, and income, Vouch lets borrowers prove their creditworthiness by getting friends and coworkers to “vouch” for them.
The folks who vouch for you (called 'sponsors') become a part of our Vouch 'social network' and have a big impact on how much you are allowed to borrow and how low your interest rate will be.
Becoming a sponsor does not come without risks, however. When you agree to vouch for someone, you decide how much money you are willing to front if they fall behind on their payments. The average loan sponsor commits $110, according to the company. From that point, the vouch system is a lot like cosigning a loan — the sponsor signs a contract and agrees to pay whatever amount they have vouched for if the borrower falls behind. The advantage of this model versus traditional cosigner rules is that if the borrower misses payments, the cosigner won't be on the hook for the entire loan, only what he originally vouched for
“When somebody receives an invitation to join a borrower’s vouch network, it’s a very personal thing,” says Vouch CEO and co-founder Yee Lee. “We’re asking people to put their money where their mouth is, and at the same time, Vouch has found a mechanism that lets people safely talk about the topic of a loan with friends and family.”
It’s become much more difficult to qualify for loans in the years since the financial crisis. Not only have lenders tightened their lending standards, but people who fell on hard times during the downturn or incurred lots of debt to get by may not look like good loan candidates.
Their business model harkens back to the good old days of banking, when a customer could waltz into their local bank and secure a loan based on how trustworthy they seemed.
But of course, when it comes to new financial services today, nothing is ever as simple as it seems.
While Vouch does take a borrower’s vouch network into account, it still uses traditional underwriting practices like checking FICO scores, credit history, and income levels. As of now, they will not loan to borrowers with FICO scores under 600, Lee says, and they must be current on all of their existing credit accounts. These could be pretty prohibitive standards, especially for people who have a history of missed debt payments.
Even Vouch sponsors themselves have their credit history reviewed before vouching for a loan candidate (this is a “soft” credit inquiry, so their credit scores won’t be impacted, Lee says). However, Vouch will not share private information about the borrower with the person who has vouched for them. People vouched for by sponsors who have a longer, healthier credit history are more likely to secure a loan—and a bigger loan—than someone who’s been vouched for by someone with a thin credit file.
“We really do try to make everybody cognizant of exactly how the relationship is going to work,” Lee says. “If you join as a sponsor...you're going to get statements and you’re going to know if the loan is delinquent or not. If the person really does end up going into default, you are going to be responsible. Be very careful about what amount you [vouch for].”
Vouch, founded in 2013, just wrapped up its first year of pilot testing and rolled out nationwide in April. So far it’s signed up several hundred borrowers and thousands of vouchers. Lee says most loans made are between $500 and $15,000. The size of the loan depends on all the usual factors like income and debt levels, but also on the number of people who have vouched for the person, including the sponsor’s credit history. They offer loans in 12-, 24-, and 36-month terms and interest rates range from 5% to 30%, a pretty wide range.
Lee says that the more people who vouch for you, the lower your interest rate will be. They are also willing to adjust interest rates after a loan is issued if the borrower gets more people to vouch for them. Lee says they are willing to adjust their rates and underwriting model as they glean feedback from users.
Who could benefit from a lender like Vouch?
Vouch isn’t the only new lender looking to shake up traditional underwriting practices. Peer-to-peer giants like Lending Club and Prosper are both in the small loans market, although they won’t give you bonus points for having friends who’d go to bat for you. For college grads looking to refinance their student debt who may have thin credit files, there are student loan refinancing services like Common Bond and SoFi, which put more weight on income level and job security than FICO scores alone.
Many of these new alternative consumer lenders have the potential to “crush the credit card business for people who carry debt at high interest rates,” says Nick Clements, CEO of consumer education site MagnifyMoney. “These new lenders (including Vouch) are building a lower cost base, charging much lower interest rates and are willing to experiment with new forms of underwriting.”
Vouch sounds like a nice alternative lending solution for people who might be getting by just fine on their current income, but don’t quite have enough savings built up to handle large expenses. We could easily see a family banding together to vouch for a young married couple who needs to furnish their new home. It could also be good for people carrying debt on several different credit cards and are looking to consolidate (just remember Vouch requires you to be current on all of your payments).
MagnifyMoney has a helpful tool that lets borrowers compare different personal loans online
And of course, a Vouch loan is certainly a better way to handle unexpected expenses than a payday loan, which can come with crushingly high fees. But the fact that Vouch’s lending standards are so high may mean their services are still out of reach for cashstrapped consumers who don't have the greatest credit. For these customers, they may have to turn to family and friends for a loan the old-fashioned way — in person.
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