SoLo Funds is a payday loan alternative with bigger plans

Travis Holoway, CEO and co-founder of SoLo Funds, says his startup isn’t just a quick way to take out a small, short-term loan. It’s the start of something bigger.

The startup, which raised $ 10 million in a Series A funding round last week, offers an app where users can lend money to each other. Borrowers typically give their lenders a small “tip” when they repay the money, and in turn, they accumulate a “SoLo score” which helps them take larger loans in the future.

While Holoway says SoLo’s immediate goal is to provide quick access to emergency capital, he adds that the startup’s real goal is to create a virtuous cycle, in which borrowers move up the financial ladder and become of lenders on the platform. Along the way, he hopes to present these users with new banking and investment opportunities that they might otherwise have missed.

“If we can get people here, take loans when they need it, pay them back on time, have access to more traditional financial tools and resources, and ultimately come back as a lender and pay it back, that’s the better life cycle. of a user on our platform, ”he says.

But if the startup can keep its promises of upward financial mobility, the reality is nuanced. Apps like SoLo Funds aren’t as predatory as high-priced payday loans, but they come with some of the same financial pitfalls. And with SoLo in particular, its use of social data to gauge user trustworthiness raises concerns about bias.

[Photo: courtesy of SoLo Funds]

How SoLo Funds works

Compared to other low dollar loan applications such as To win and Dave, SoLo Funds is unique in that it is unrelated to employee salaries and does not lend money itself. Instead, it outsources the work, allowing users to apply for loans in an open market. In exchange for taking risk, lenders can earn tips of up to 12% of the original loan value, with the exact amount set in advance by borrowers.

Loans can go up to $ 50 and up to $ 500, but SoLo does not allow new borrowers to ask for what they want. To increase what they can borrow, users must develop a history of successful loan repayments on time. It also contributes to a borrower’s SoLo score, which lenders use to assess the risk of any loan.

In a way, the SoLo market reflects the dynamics of real credit scores. Users with no track record on the platform tend to pay higher tips, around 8% on average, but as their reputation improves they are able to attract lenders while offering less. Holoway says long-time borrowers tend to tip around 3% to 5%.

“This is because they actually have more history on our platform over time, which makes lenders see these people as safer opportunities,” he says.

As for borrowers who fail to repay their loans on time, SoLo charges the borrower a one-time late fee of 15% plus an administrative fee of $ 5. Beyond that, however, the amount owed by borrowers does not increase or increase over time.

This is a major distinction from traditional payday lenders, whose business models consist of trapping borrowers in a long-term debt cycle. According to the Consumer Financial Protection Bureau, the average borrower delays (or “postpones”) a loan repayment three to four times, and about a quarter of borrowers renew their loan more than nine times. Each rollover allows lenders to charge more interest, and payday lenders make about 75% of their fees from borrowers who renew their loans more than 10 times a year.

SoLo, by comparison, will direct delinquent borrowers to a collection agency and credit bureaus, but the other main penalty is not being able to use the platform anymore. Holoway says its default rate is three times the industry average for payday loans. (Lenders can potentially cover the risk by paying the insurance as a fraction of their tip, although they also pay a fee if their loan is clawed back through collections.)

“Borrowers are inclined to repay these loans because if they need to access this type of capital in the future, they will not have access to it if they are in default and do not repay this initial loan”, he said.

Unmet needs

Holoway says the idea for the SoLo funds arose out of personal experience. He and his co-founder Rodney Williams became best friends early on while they both lived in Cincinnati. Holoway then moved to New York and became a financial advisor, while Williams became brand manager at Procter & Gamble, and then co-founded ultrasonic authentication service Lisnr.

We didn’t want to send anyone we know, like or love to take one of these predatory loans.

Being financially successful at a young age came with a burden on both founders, Holoway says they were often in the position of having to lend money to friends and family. When they looked for other ways to get small, short term loans, all they could find was payday lenders.

“We didn’t want to send someone we know, love or love to take one of these predatory loans, so at that point we realized there was an opportunity,” Holoway said.

He and Williams are both black, and while Holoway doesn’t like to dwell on the challenges they faced as black founders, he says they had to show more resources to raise funds. Data Crunchbase shows that prior to SoLo’s Series A, the startup raised funds through convertible notes – a form of debt that turns into equity – in addition to a fundraiser and participation in Techstars, an accelerator based in Kansas City, Missouri.

Although some venture capitalists have questioned the ability of SoLo Funds to succeed in a downturn, Holoway points out that revenues have increased 40% month over month since the start of the pandemic and that the platform currently has 100,000 active users per month.

“At the end of the day, the match model that VCs do when looking for their next billion dollar release, there aren’t many people like me who have achieved that,” he says. “When you put numbers on the board, people start to wake up. “

Hidden costs

This is not to say that the SoLo Funds model is without potential drawbacks. Because the startup doesn’t charge any interest on loans, it has to rely on other ways to make money, some of which may seem devious.

[Photo: courtesy of SoLo Funds]

When applying for a loan, for example, SoLo asks borrowers to choose an in-app “donation” in addition to their tip to the lender, starting at 7% or $ 3.50 for new borrowers looking. in loans of $ 50. Technically, the donation is optional, but the only way to avoid it is to switch to SoLo’s settings menu, which must be re-enabled with each request. There is no way to decline donations while making the request itself.

Industry watchdogs have also raised concerns about the tip model. While SoLo’s tips are also voluntary, and around 7% of loans funded on the platform do not involve any tips, the app notes that loans are much more likely to be funded when users tip. maximum. Between tips and donations, users can end up paying a rate that is hardly more favorable than payday loans, although the late payment model is less predatory.

“In general, the tip model just bypasses the rules for disclosing loan fees, and people end up paying a lot of money, and it’s not clear how voluntary tips are,” says Lauren Saunders, Associate Director of National Consumer Law. Center.

How SoLo Funds factors social media data into user reputation scores is also in the dark. (Holoway wouldn’t tell me much about the details of how this works, saying they’re exclusive.) Saunders says that because social media can be related to race and user community, the use of this data raises concerns about the fairness of loans.

“Most lenders avoid using social media for fear of breaking fair lending rules,” she says.

Holoway notes that SoLo Funds is not bound by these rules as it is not a lender itself and does not share any of its data with lenders on the platform. But in a way, users still see the effects of this data through the scores displayed to them for each borrower. And without reading SoLo’s Terms of Service, users may not even realize that the data is being used for their scores in the first place.

“This is not an area that is well understood in terms of the actual fundamentals that determine whether someone has the financial means or not, and there are all kinds of concerns as to how the use of these elements as proxy incorporates all kinds of other issues, ”says Graham Steele, senior researcher at the American Economic Liberties Project.

It is harder to say whether these concerns invalidate what SoLo Funds is trying to accomplish. Steele argues that short-term loans are a narrow fix at best for a small group of people, namely those who find themselves in some sort of specific short-term nip but who otherwise can usually pay for what they need. .

“For someone who is consistently behind on their rent, who is unemployed and has no potential source of income, a loan will only be a downward anchor, rather than a ladder he can climb, ”says Steele.

But Holoway’s personal experience says otherwise. Growing up in Cleveland during an economic downturn, he saw how often people can find themselves in temporary traffic jams. If SoLo can become the default place for people to turn to get out of these situations, it opens the door to all of the company’s long-term plans, such as introducing users to banks and credit cards. , and better investment opportunities.

“Our goal,” he said, “is not for borrowers to remain borrowers on this platform forever.”