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

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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.

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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.

Borrower Story: Mombasa, Kenya

BTCJam was founded during the tail end of the global financial recession. Having experienced the impact of the recession in Brazil (a BRIC country) and seeing first hand the collapse of the banking system, the founder of BTCJam, Celso Pitta, realized that there needed to be an alternative source of lending. As a currency, bitcoin seemed to be the safest, easiest, cheapest, and most transparent way to achieve lending on an international scale.

The great recession that began in 2007 hit emerging economies like Brazil much harder than developed nations. Many emerging economies have colonial origins and, therefore, are more reliant on commodity prices. When the financial crisis hit its low point in 2008, developing countries were hit the hardest. Many of these countries were reliant on outside aid from the developed world. As international trade dramatically slowed and developed nations tightened their wallets, countries around the world experienced a devastating impact.

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With over 50,000 users spanning across 180 countries, it is sometimes difficult to see how individuals at BTCJam are interconnected. On our platform, we have created a truly global peer-to-peer lending site through the power and technology of Bitcoin. The impact of the global recession serves as a reminder that the world is financially and economically intertwined. Borrowers and lenders at BTCJam can easily get bogged down in the micro managing of loan financing. At times, it is good to step back and see the broader picture of what we are accomplishing around the world.

In order to paint a clear picture of the global amalgam of borrowers and lenders, BTCJam has initiated a “Borrower Story” news segment. These stories are intended to weave a sort of “tapestry” of borrowers and show how they are interconnected in our global community. Often, BTCJam borrowers come from areas of the world with poorly functioning banking systems, rampant financial corruption, and lack of basic financial resources. Even in developed countries, borrowers can face many obstacles and red tape while trying to access fairly priced loans.

The BTCJam community members featured in the Borrower Story newsletter are all users who have been active on our website, have a unique story, and have paid back their loans in full. Borrowers at BTCJam take out loans for a variety of reasons. Many use their loans to fund small startup businesses; some have outstanding medical or credit card bills while others might be planning a big wedding for their bride to be. Whatever the reason, BTCJam has enabled micro lending in all corners of the world through the power of Bitcoin.

The first borrower we would like to feature in our news segment is Samuel from Kenya. Samuel lives in a small town close to the port city of Mombasa. With a loan from BTCJam, Samuel has been able to inject funding into his two small business ventures and create more financial stability.

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While living in a fairly rural area, Samuel saw a growth opportunity for Internet related businesses. Samuel is a self-described “social entrepreneur” who “engages in small businesses that help low income earners.” Friends of Samuel describe him as “a go getter and a hardworking businessman.” With his loan from BTCJam, Samuel has funded his Internet café. Members of his community can use his business to “apply for jobs, complete tax IDs, connect on social media, and download government pay slips.” According to Samuel, “Kenyans in rural areas have almost no access to banking. Money transfers for food, medicine, or school fees are things that only city dwellers can attain…I like helping people and making good friends so I thought that an Internet café would benefit my town.”

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Samuel also runs a metal welding business that provides jobs for the youth while encouraging creativity and innovation. Highly technical jobs like metal welding often require special parts to be ordered, which can become costly. Samuel explains, “My loan has allowed my workman to buy a grinder to quicken his work timelines in delivering customer orders. Previously he has [had] to use a hacksaw to cut metal before welding pieces together.” Samuel’s business has become essential to the community as many people rely on his business to fix metal doors, locks, and other heavy parts.

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When asking Samuel why he turned to BTCJam as an alternative to the Kenyan banking system, he stated, “Kenyan banks charge higher interest rates about 20% and demand collateral for people who are informally unemployed like myself.” While Samuel has a bachelor’s degree in finance, he understands that the lending climate in Kenya is not ideal for small business owners. Instead of applying for a loan at a local Kenyan bank, Samuel took his search online. Samuel explains, “I was looking online for an affordable money transfer service. I saw Western Union, Moneygram, and bitcoins. I was a bit more curious to learn about bitcoin and how it worked. That is when I landed on BTCJam.” Samuel adds, “I would have not participated on BTCJam were it not for localbitcoins.com, which offers a liberal marketplace for bitcoins and affordable rates.” Samuel’s 60-day loan was repaid in full and was funded by 17 lenders from 10 different countries.

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Loan demand is skyrocketing in African countries because of strong economic expansion. Much of this is spearheaded by China, which sees infrastructure and technology development as key growth areas. China has invested hundreds of billions of dollars in Africa to assure long-term food supplies for their own burgeoning population. This has created an economic boom and the emergence of a new, borrowing, consuming middle class. The World Bank and IMF have initiated major capital projects in Africa like dams and power infrastructure; meanwhile, Bill Gates has spent billions bringing Malaria and other diseases in Africa under control. Fewer sick people means a stronger economy.

Although Kenya has experienced a robust 4-5% GDP growth YoY, the country ranks as one of the least financially and politically transparent nations in the world. Poor government administration, weak property rights, and strict capital controls have prevented Kenya from achieving growth comparable to their neighbors. In Kenya, corruption remains very difficult to investigate and prosecute and as a result has created a sense of mistrust in the banking system. Although this is true, the Nairobi Stock Exchange (NSE) has grown to the 4th largest capital exchange in Africa. Kenya has also joined the East African Community (EAC) organization, a partnership between Kenya, Tanzania, and Uganda. This organization has helped to create a common marketplace in East Africa and is modeled after the European Union.

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The instability of the global financial system has created new avenues of affordable online financing. International bitcoin lending has picked up traction in the online community and BTCJam has been central in this financial revolution. Global peer-to-peer lending has enabled people in developing countries to become entrepreneurs and has allowed many of them access to fairly priced loans for the first time in their lives. As we move forward with the Borrower Story news segments, readers will be able to see the diverse undertakings and business ventures of BTCJam users.

What is the process of getting a loan on BTCJam?

Getting a loan on BTCJam is a very straight forward process.

Here is how it works:

1. Verify your identity

Verifying your identity is the initial step in applying for a loan at BTCJam. We will ask for your photo ID, address verification, income verification, banking conformation, social network ids, personal references, your Paypal account, and your Ebay account.  The more complete your profile is, the more trust you gain in BTCJam and, thus, the more likely your loan will be funded.

Make sure to use high quality photos/scans, so that our verification team can easily read all the important information from your passport, your income stubs etc.

Do I need to have all of these social networking accounts?

You don’t need all of the items listed above. HOWEVER, our credit score algorithm will likely give you a low rating if you have only a few items verified. The minimum verification we require is your identity and address, but beware, your interest and APR will be extremely high. The more legitimate and trustworthy you appear, the more likely you will get funded on good terms.

How long does the verification process take?

1-2 business days after you have submitted your documents.

2. Describe your loan and decide the terms

Go through our easy loan creation process. Here you can describe why you need the loan and how you will repay it. You can also set the terms: length of the loan, interest rate you want to pay, and frequency of payments.

After that, all you have to do is to hit Publish and you’re all set!

3. Watch investors fund your loan and get the money!

This is the fun part. Watch as investors come in to fund your loan. Of course it helps to tell friends and family about this, as they can increase the speed at which your loan gets funded and it increases social verification for investors.

As soon as the listing has been funded by at least 70%, you can activate the listing! This binds you to the terms you defined in the loan listing in step two.

The best part: The bitcoins are instantly available in your account.

So are you ready to get a loan? Click here to get started!