BTCJam Introduces Risk Based Pricing (Interest Rates Set Automatically by Credit Score)

riskbasedheader

BTCJam is changing the way interest rates are set in order to improve the experience for both borrowers and investors. Starting today, BTCJam will set the borrower’s interest rate automatically based upon their credit score. The higher the borrower’s credit score, the lower their interest rate.

Automatically calculating the interest rate based upon credit scoring is known as risk-based pricing and is a well known and time proven methodology within the financial services industry. Interest rates are set by a combination of the borrower’s credit rating (using BTCJam’s proprietary credit rating system) and the duration of the loan. Borrowers who are less likely to default will receive lower interest rates.  Since BTCJam has all of the information about the borrowers, we are in a better position to determine the likelihood of the borrower paying back the loan and will adjust the interest rate accordingly. Risk-based pricing makes investing easier because when a lender invests in an A-rated loan, they know that the borrower will be paying an A-level interest rate.

fixedrate

Interest rates are set by a combination of the borrower’s credit rating and the duration of the loan. Borrowers who are less likely to default will receive lower interest rates.

When borrowers are allowed to set their own interest rates, it is far too tempting for them to set a low interest rate and see if investors will accept lower returns.  While a borrower who receives a very low interest rate usually pays back their loan, it does not provide the investor any cushion against possible defaults.  With risk-based pricing, the interest rates for all loans will be standardized, ensuring that investors are able to offset possible losses from defaults.

We are confident that this change will improve BTCJam and allow us to continue to maintain the highest repayment rates in peer-to-peer lending (as high as 98% for A-rated borrowers), as well as increase overall returns to investors.

Check out the changes and start investing with BTCJam.  Get a loan with a reasonable rate with BTCJam.

Risk Based Pricing (automatic interest rates) Q&A

Q: What will happen to loans that were created before the change to Risk Based Pricing?

A: Loans created prior to the adoption of Risk Based Pricing (automatic interest rates) will continue until they have either been funded or have expired. BTCJam will identify the old loans and will separate them so they will be only be accessible using filters.

Q: The system sets a rate that is too high for me and I won’t be able to repay it. What should I do?

A: If the interest rate on your loan is too high you should verify more documents and add more information to your profile. By verifying more information, you will increase your credit score and receive a lower interest rate.

Q: Do I still have the option of doing a loan tied to a local currency?

A: Yes you will still be able to choose between a Bitcoin loan and a loan tied to local currencies. Learn more about currency types.

Q: Why did BTCJam choose to change the way that interest rates are determined?

A: BTCJam changed to risk-based pricing for a number of reasons. One reason being investor and borrower security. By setting the interest rates automatically it simplifies the risk assessment for both borrowers and lenders. Learn more about risk-based pricing.

Q: Will there be a set standard for interest rates based upon credit rating? For example, will all C rated borrowers have loans set at a standard 5.5% interest regardless of profile completeness?

A: Yes, every credit score grade will now come with a set interest rate that is the same for all borrowers that have the same credit score. However, rates will change also according to the loan term. That means, a C loan for 30 days will have lower rates than a 1 year loan for a C rated  borrower.

Q: Can I pay more than the recommended interest rate?

A: No. The interest rates are now automatically linked to your credit rating.  This change protects our investors from loans that are “too good to be true” and that the borrower never intends to repay.  We took into consideration both borrowers and investors when making this change.

The Stats Page

BTCJam is proud to release the first edition of the stats page!

Feel free to take a gander and play around. The keys at the bottom of each chart are filters!

Here is an in depth explanation:
We begin with the overview map of all loans that have been serviced on BTCJam by location.

image

Top 5 Countries or Regions:

  • United States: 3,900
  • United Kingdom: 632
  • Brazil: 383
  • Canada: 350
  • Australia: 281

Honorable Mentions:

  • Kenya: 83
  • Indonesia: 211
  • India: 161
  • Argentina: 102
  • Turkey: 72

Below the map is a graph displaying the loan volume per month beginning January 2013 to August 2014.

The blue line shows the growth by loan amount in USD, please note that each loan is indexed to the current market rate of bitcoin at its activation.

The green bars reflect the total amount of loans per month.

image

Total Investor Returns reflects the return on investment (ROI) from January 2014. If an investor had invested in every loan since then, this would the ROI by credit score.

The ROIs are broken down by the borrower’s credit score and include the defaults.

Here is an explanation for BitstampUSD loan types vs. Bitcoin loans.

image

Loans by Credit Score shows the percentile of all active loans by credit score of each month starting January 2014. When you hover over, you can see the loan amount in USD (indexed to market rate of Bitcoin at loan’s activation).

image

The Loan Purposes chart is a pie graph displaying all the different loan types.

image

Thank you to all our borrowers and investors for making BTCJam the leading P2P Bitcoin lending platform!

Stay tuned for more updates and additions to the stats page 🙂

5 Ways Peer-to-Peer Lending Creates ROI for Investors

Peer-to-peer lending is a relatively new concept that helps borrowers find great deals on loans. In order to finance these types of loans, peer-to-peer lending relies on individual investors who fund each loan in small amounts.

image

Source: Shutterstock

This method of lending is fast, efficient, and often lowers the cost of a loan for borrowers; at the same time, it provides a stable rate of return for investors.

Why does peer-to-peer lending offer a higher ROI compared to other investment methods? Let’s take a look at 5 compelling reasons why this form of lending is beneficial not just for borrowers but also for the investors who back these loans.

A Proven Model

Ever since Lending Club and Prosper were founded in the United States in 2006, the industry for peer-to-peer lending has been booming.

These stalwarts have been originating more loans than ever before. Here is the US market’s performance over time:

image

Source: Crowdfundinsider

Peer-to-peer lending is now producing over $500 million in loans per month through Lending Club. That’s impressive for an industry founded only eight years ago. It is clear that demand is on the rise and there are no sign of slowing down.

An Avenue for Specific Borrowing

Whether it’s paying down debt or financing bitcoin miners, peer-to-peer lending allows borrowers to obtain loans for things traditional lenders might be wary of.

According to Prosper, debt consolidation loans are one of the most popular peer-to-peer lending loans.

image

Source: CreditCards.com

For a bitcoin miner, trying to get a loan from a bank or other traditional lender would be very difficult unless the borrower could provide a specific business case for doing so.

The bottom line is that peer-to-peer lending allows individual investors to be creative in deciding what types of loans to fund for borrowers.

Spreading out the Risk

Those who invest in peer-to-peer loans are able to diversify, therefore, spreading out risk by funding many different loans.

It’s important to understand that borrowers sometimes don’t pay back loans, known as a default. It’s something that cannot be avoided in the peer-to-peer lending industry and even in regular banks. If investors diversify their investments through many different loans, overall investor risk can be reduced.

image

Source: LendingMemo

Data pulled from Lending Club shows that when investors diversify their funds through many different loans, they are able to obtain returns that are much better than a high yield savings account. Frequently, these peer-to-peer funds outperform mutual funds and other money management funds.

Helping Borrowers with Not So Perfect Credit

Many borrowers on peer-to-peer lending sites are looking for access to low interest rates while often not having a perfect credit score.

This is one of the reasons peer-to-peer lending has become so popular: it can be easier to get a loan on a peer-to-peer marketplace than going to a bank. For some borrowers, alternatives such as payday loans may levy interest rates at 15%+ p.m, plus fees.

image

Prosper credit scores in 2013. Source: Orchard

The average credit scores in the 660-670 range on Prosper’s lending marketplace constitute what credit scoring systems would consider “good” borrowers. This is in between the lower-end “fair” and the upper “excellent” tier of borrowers through the FICO scoring system.

Cheaper for Borrowers, Good for Investors

Large corporate banks are complex organizations. During the process of a loan approval, the loan goes through many different channels which leads to very high overhead in operating costs.  Banks have to comply with more regulations than peer-to-peer marketplaces, therefore, interest rates and overall APR can be extremely costly.

Banks pass the cost of running their banks onto borrowers in the form of pricey fees, high standards for loan approval, and long lead times.

image

Source: Foundation Capital

Peer-to-peer lending marketplaces are a faster and less expensive for everyone involved. The whole process is simpler in comparison to what the banking industry must do to lend people money. Due to the lending process being entirely online, peer-to-peer lending market places create an easy and user friendly way to apply for loans.

 

Where BTCJam Stands

BTCJam is a unique peer-to-peer lender in several different ways:

  • By utilizing our unique in-house credit scoring system, borrowers can instantly create a credit profile when they supply us with certain information. As they complete more of their profile, their credit score becomes more accurate and generally improves. A full profile also has the benefit of creating more trust for investors.
  • We are able to leverage the low costs of capital in the developed world with the high costs of borrowing in many countries. Because of this global advantage, we can return to investors a better rate of return and provide more affordable loans for people in developing countries.
  • Because we use the digital currency bitcoin as a transaction protocol, we can connect borrowers and investors globally – a borrower can convert a loan and investors can convert their profit into local currency whenever necessary.

These factors are key reasons why we are able to provide investors great returns.

Here’s how to learn more about investing in bitcoin loans on BTCJam’s marketplace.

 

Why Payday Lending is Such an Awful Deal

We’ve all seen them. Some of us have probably even been tempted to get one. They are generally known as payday loans, although they have many different names – including cash advances, pay advances or unsecured loans.

No matter the name, all payday loans generally mean one thing: horrible rates for borrowers.

COLORFUL ADVERTISING 

Walk past any payday loan shop and you’ll probably see a number of signs in the windows.

image

The purpose of these flashy signs is to attract customers who are spontaneous, desperate, and who are looking for a loan ASAP.

Instead of doing that, we’ll tell you exactly what these services really are:

Checks Cashed: This service will take a paycheck and turn it into cash money for a customer.

Cost: In some states, payday lenders can charge at least 3% for this. For someone cashing a $1,500 check every two weeks this would cost $45, or $1,700 annually

Money Orders/Bill Pay: This is an alternative to using checks or electronic payments to pay bills, since cash is not accepted through the mail or online.

Cost: Mybanktracker did some research on Western Union, finding that on average it charges $.70 per money order, which would be $8.40 just to pay a monthly bill yearly through the mail.

Title Loans: Also known as a secured loan, this is where a lender will keep something of value as collateral from a borrower. Usually, a car title is used.

Cost: According to Car Title Loan, the average percentage rate of these loans can vary between 36-360% in annual percentage rates, or APR.

Payday Loans: These are short-term loans designed to help a borrower short on money until their next paycheck.

Cost: Usually a flat rate, for example $10 to borrow $100 for two weeks. Lenders must also inform borrowers of the annual percentage rate (APR) of these loans. Which leads to more than 200%!

MISLEADING ADVERTISING

Slick advertising targeted towards borrowers trying to make ends meet is a well-worn marketing tactic in the short-term lending industry.

Often payday loan shops will entice prospective customers by showing them a deal right on the window. It is not uncommon to see displays like this:

image

Source: Wikipedia

The question is, how is it possible for these lenders to lend borrowers hundreds of dollars for only $20? In the short term, these lenders make their loans look like a flat fee loan. What the loans really are is an extremely expensive credit card if borrowers don’t pay back the loan in time.

COST CALCULATION

Calculating the Long-Term Cost of a Payday Loan

There are deceptive issues with the so-called flat fee structure that payday loans use.

Take the example above for the CashMoney payday-lending store. If a borrower were to obtain $200 for $20 over two weeks, the APR of such a loan is 260% and would cost:

image

Source: The Calculator Site

This doesn’t include additional fees that might be levied against a late borrower. According to MoneySuperMarket, a survey found only half of payday loan borrowers are able to pay back the amount owed in time.

For example, payday lender Check Center charges a $15 late fee when payment is not on time – and doesn’t specify on its website how often this could be charged.

In some jurisdictions, payday lenders are required to notify lenders of APRs – you can see an example chart on the Check Center website. The purpose is to serve warning about the expenses of late payment, which can build up immensely over time for borrowers of these types of loans.

Calculating Long-Term Cost of a Title Loan

image

Source: Carbucks

According to Bankrate, the cost of a title loan is usually somewhere around 25% for 30 days.

Borrowers must submit a title and access (usually in the form of keys) to the lender as collateral. These loans are usually a fraction of the value of an asset put up as collateral.

25% every thirty days is 300% APR. If a borrower takes out a $5,000 loan using a title to secure it, to pay it back in one year would cost:

image

Source: The Calculator Site

Again, this doesn’t include additional fees that might be levied against a late borrower.

LEGALITY

It’s no wonder that payday loan companies usually set up shop far away from banks and dress up storefronts with colorful, eye-catching signs. If a borrower gets caught in debt to one of these lenders, it is very hard to escape as the costs begin to escalate.

It’s easy to wonder how these lenders are able to stay in business legally – if you fall behind when borrowing money from a payday lender, you can get into some serious trouble.

The Guardian recently reported that the number of complaints about payday lenders in the UK have doubled  in just the past year – sure to bring attention to the problems of payday lenders by lawmakers.

BOTTOM LINE

Stay away from payday lenders. Peer-to-peer bitcoin lending is often a better alternative to borrowing money.

Click here to see how a  bitcoin loan is an option.

Simply put, payday loans are not worth it. There are plenty of other options for borrowers.

Opportunities for Bitcoin in Indonesia

In 2005 I spent three months in Jakarta, Indonesia, teaching at a school for disadvantaged children. The school, established by the Dilts Foundation, provided among other things, education to street kids and other children who did have access to a traditional educational system.

The program I participated in was called “Children of Tomorrow.” Besides teaching the children English, our mission was to provide them the opportunity to develop their entrepreneurial and leadership skills. This enabled them to instill positive change and advancement in their lives.

Teaching through the program was a truly unique and life-changing experience. I was overwhelmed by the happiness of the local people. Although their lives were so challenging and difficult, I was touched by their generosity despite the limited resources they had. I realized that by growing up in a developed country I took for granted things like running water, toilets, and three meals a day.

These children and their families, like almost 80% of the population in Indonesia, had never been to a bank or had access to a bank account. Banking and other financial services are not readily available to the majority of the population. There are various reasons for the high percentage of under-banked in Indonesia.

First, Indonesia is a cash-economy. In Indonesia, they live by the mantra “Cash is King.” It is very much a part of the culture to receive, spend, and save money in cash. In Indonesia, most restaurants, stores, and institutions only accept cash as a form of payment. Even if you have a credit card, many places will not take it.

Another significant reason why people rely heavily on cash is that for many people, financial services are too expensive. With an average monthly income of $200, disposable resources are limited and financial services are not a large priority. Indonesia is an archipelago of more than 13,000 islands; on most islands the banking infrastructure is barely developed. For most banks, it is not profitable for them to establish branches, ATMs, and other services. This leave a significant part of the population without access to banks and other financial services.

A statement often made is that bitcoin can change and improve lives of the under banked. These people have a need for a service that facilitates small transactions in a cost effective manner. Additionally, bitcoin acts as a solution to hold value safely through a provider they trust.

Although the vast majority of the under banked are not very tech savvy and do not have easy access to internet, many have mobile phones. In Indonesia, 84% of the population owns a mobile phone; by developing mobile solutions using the bitcoin protocol, financial services can suddenly become very accessible for these people.

In the past few months, bitcoin has slowly, but steadily gained traction in Indonesia. In December 2013, the first bitcoin exchange opened, bitcoin.co.id. There are several entrepreneurs developing bitcoin applications and services for merchants that have started accepting bitcoin.

BTCJam has seen a tremendous growth of users from Indonesia: more than 1000% in the last three months! Most users from Indonesia on BTCJam are borrowers who take out loans for business activities. Some of these busiesses are even bitcoin related! Borrowers can use loans to buy mining hardware or to trade on LocalBitcoins. These BTCJam users are contributing to the bitcoin ecosystem in Indonesia and they provide liquidity to the local market.

The opportunities for bitcoin in Indonesia are immense: with a population of 240 million, where 80% is under banked, bitcoin can have a significant impact on the lives of at least 190 million people. The “Children of Tomorrow” at the Dilts Foundation and their families showed me how the banking system in Indonesia does not serve the needs of the majority of the population. I believe that bitcoin can increase the opportunities of Indonesians and people in other developing countries by satisfying their financing needs and necessities.

image – Isabelle de Clercq 

Untangling Peer-To-Peer Lending, Crowdfunding, and Microlending

In my previous post, I provided a short overview of the evolution of the lending space and the role of banks herein. Over the past years, especially as a result of the financial crisis and arising regulations, banks have pulled back from issuing loans. This has paved the way for alternative financing solutions like Peer-to-Peer lending, crowd-funding and micro-lending.

The most significant similarity between these three services is that there is no involvement of traditional financial institutions. In this post I will discuss their most important features, explain which markets they serve, and show what their key differences are.

Peer-to-Peer Lending

The core concept of Peer-to-Peer (P2P) Lending is a that a group of investors lend to one person or business without the interference of traditional financial institutions. Usually the investors are individuals who are not related to and do not know the borrower. The development of the internet has enabled this new form of lending: an online marketplace that completely facilitates the loan transaction.

An interesting trend in the P2P Lending space is the increased participation of institutional investors and banks. P2P Lending companies can operate more efficiently thanks to the use of new technologies and less overhead cost, thereby making these marketplaces very interesting for both borrowers and investors. According to Charles Moldow, a partner at Foundation Capital, P2P Lending Platforms have a 400 basis point advantage compared to traditional banks.

A notable player in the field in Europe is Zopa (located and operating in the UK). In the United States, LendingClub and Prosper are the first P2P lending platforms who service the US market. Funding Circle and OnDeck also facilitate small business loans through their marketplaces.

A new and truly unique P2P Lending platform is our company, BTCJam! By using bitcoin as a transaction protocol and a global credit-scoring model, BTCJam is the only P2P lending company that operates worldwide.

 

Crowdfunding

Crowd-funding is based on the same principle as P2P Lending: funding takes place by a group of investors. There are significant differences between the two:

First, crowd-funding is typically used for specific projects or ideas and not for personal loans. The second distinct difference is that investors who contribute to a project do not get interest–instead they’ll receive rewards, special perks, or gifts. For example, they may get the first release of an album or the product they supported.

A new development within the crowd-funding industry is the so-called “Equity-Based” crowd-funding: as a reward, investors receive unlisted shares of the company. Equity crowd-funding has been a popular way of raising capital for companies in Europe and Australia for several years. In the United States, equity crowd-funding is only accessible for accredited investors, but this could change soon based on the JOBS Act. The JOBS Act would let non-accredited investors gain access to equity crowd-funding which would dramatically expand the possibility for startups and entrepreneurs to raise capital. Seedrs is an Equity crowd-funding marketplace that operates only in Europe and has been very successful.

A well-known crowd-funding platform is Kickstarter; people have pledged over $1 billion, funding 65,000 projects. Kickstarter is not equity crowd-funded, which prohibits individuals from making long term equity on the products they invest in.

 

Microlending

The main goals of micro-lending are to financing poverty stricken areas of the world and reach underbanked communities. The loan amount is usually very small and the purpose of the loan is usually for personal use. Many of these loans help to finance medical bills, small businesses, education, and agricultural development.

In P2P lending and crowd-funding, there are multiple investors contributing to the loan, whereas in micro-lending, you often see that also the borrowers team up. Loans are provided to a group of people who will vouch for each other, thereby, minimizing the risk of default.

The first micro-lending initiatives did not have profitability as a driver, but over the years some micro-lending institutions have argued that doing good shouldn’t stand in the way of making profit. Opinions remain divided on the subject.

Grameen Bank is one of the first and leading Microcrediting organizations. Besides micro-lending it also offers other financial services. Kiva created an online marketplace to connect investors with borrowers in developing countries. Kiva works with local field partners who assess, distribute, and monitor the loans.

In the chart below I summarized the characteristics of the three financing solutions. The alternatives to traditional banking loans all serve different markets and it’s strongly recommended to research which solution suits your needs.

image – Isabelle de Clercq 

Milestone: One Million in Loans Serviced On BTCJam in June Alone

                                    image

BTCJam is proud to announce that we have hit a milestone of one million dollars (bitcoin equivalent) in loans serviced in the month of June alone! On top of that, we now have over 4,000 loans repaid since November 2012.

It has been an honor to pioneer global peer-to-peer lending powered by bitcoin. From doing experiments with anonymous loans to where we are at today, we are eternally grateful to our supporters and members. It is incredibly humbling to see many businesses get their initial liquidity on BTCJam, watch others fund their projects from America to Argentina to the Philippines, and have people use BTCJam as means of consolidating their fiat debt.

At BTCJam, we have unwavering dedication to provide the optimal platform for our members. We want users to be able to borrow at reasonable rates that they choose while still enabling investors receive healthy returns. We thank all of the investors that have supplied the liquidity that funded over $1,000,000 (bitcoin equivalent) in loans, and thank you to all the borrowers who have repaid over 4,000 loans!

Grow your bitcoins on BTCJam!

– The BTCJam Team