Academic journal article Global Journal of Business Research

Viability of a Peer-to-Peer Loan Market for Students and the Underbanked

Academic journal article Global Journal of Business Research

Viability of a Peer-to-Peer Loan Market for Students and the Underbanked

Article excerpt

ABSTRACT

It is difficult to achieve financial stability without access to traditional banking services. "Unbanked" and "underbanked" groups therefore face significant financial hurdles, making them targets for predatory fringe lenders. In this paper, we present the results of a credit survey given to college students and low-income residents of Tacoma, Washington. Our first goal with this survey was to characterize credit use and access among these groups. Given that information, we then could assess the feasibility of developing a viable peer-to-peer (P2P) platform for them that would be a consumer-friendly alternative to fringe lending. We find that there is a need for small-dollar financial assistance, even within our relatively affluent student sample. We discuss the possibility of creating a student P2P market to help them, working through Four Horsemen Investments, a student-run 501(c)(3) not-for-profit organization. Developing such a market on a small scale would be a precursor to expanding it to the local community, where it could help at-risk, low-income families.

JEL: G21, G23, G10

KEYWORDS: Peer-to-Peer Lending, Payday Loans, Fringe Credit

INTRODUCTION

Ignorance may be bliss elsewhere, but not in personal finance. For consumers, not understanding the terms of loan products can be devastating, especially with fringe, "predatory" loans. Given the dangers, these sorts of loans are receiving renewed attention at both the federal and state levels. For example, in a speech on March 26, 2015, President Obama warned payday lenders that if they made their profits by "trapping hardworking Americans in a vicious cycle of debt, then you need to find a new business model" (Korte, 2015). Meanwhile, in Washington state, the legislature is considering a bill to allow payday lenders to charge $495 in interest on a six-month, $700 loan-a loan that would cost borrowers "only" $38 if repaid in two weeks. Opponents charge that the idea is "a travesty"-a way "to make more money on the backs of poor people." A prime sponsor of the bill counters that "...a lot of people don't like the fact that we have a lot of low-income people who can't make ends meet, and so there has to be a product like this" (Conklin, 2015). But does there have to be a payday loan product? In 2010, the U.S. Treasury sponsored a convening to consider this question. Participants enumerated a research agenda to inform policy on small-dollar, short-term credit. In this paper, we present the results of a survey based on that agenda. Our immediate goal with the survey was to characterize the financial sophistication and credit use of students and lower-income residents in our community, two groups potentially vulnerable to financial shocks and therefore to fringe lending. Ultimately, though, we hope to develop an alternative to payday products for our community, based on a not-for-profit, peer-to-peer model. We believe that such a model could empower participants in a way that fringe lending cannot.

We find that our survey respondents have good access to traditional banking products. Nonetheless, respondents in both groups are subject to financial distress. Both groups also exhibit significant ignorance about the features and terms of the products they use. Distress with ignorance is a combination dangerous to financial health. We therefore conclude that members of our community would be well served by a new type of product to address their credit needs. Recent developments in the traditional peer-to-peer (P2P) market may make it a possible solution for community members. For our students, however, we are developing a different sort of model, based more on the altruistic principles underlying our not-for-profit company, Four Horsemen Investments. We sketch out our proposal in our conclusions. The paper proceeds as follows. In the next section, we review the literature on both fringe credit and peer-to-peer lending. In the following two sections, we describe our survey and its results. …

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