The initial promise of P2P lending when Prosper launched back in 2006 was that it would be a more social way to lend money. We would borrow money from a group of people we are connected with and pay back this loan more diligently because of that connection. Unfortunately, the reality was different than the promise. The financial crisis hit and the connections proved more tenuous than expected.
Today, a new kind of lending platform is bringing this social promise back. But it is applying more rigor to the way social signals are used in underwriting and pricing. Introducing Vouch, a new lending startup founded by former PayPal and Prosper executives that bills itself as the social network for credit. It has raised a $3 million initial funding round and started making loans in November last year. Recently I chatted with CEO and Co-founder Yee Lee to discuss how Vouch works and why he thinks it will be successful.
How the Vouch System Works
Borrowers apply for a loan either on Vouch’s site or through their mobile app. Then the borrower can invite friends and family to “vouch” for them. These people are then invited by Vouch to fill out a short survey and asked if they would be willing to contribute if the borrower becomes unable to make the payments on their loan.
Vouch looks at a number of factors to determine what interest rate it offers a borrower. It looks at standard financial data as well as the data they obtain from the social network. This includes how “vouchers” answered survey questions, how quickly they responded to a request to vouch for a friend, response rates for vouch requests, the overall size of someone’s network, how many vouchers took the extra step to also sponsor a loan, and much more.