GreenNote Inc., a Redwood City, Calif., company founded last year, launched a Web site Wednesday that facilitates student loans funded by the borrowers' acquaintances.
Many person-to-person lending sites bill themselves as investment tools that let people fund loans to get a better return than the stock market or savings accounts might provide. Many of the sites tout social connections between lenders and borrowers, such as a shared alma mater, but largely cater to people who did not know one another. (A notable exception is Virgin Money USA, which arranges real estate loans between acquaintances.)
GreenNote tells prospective borrowers to appeal to relatives, classmates, neighbors, and others they know, who can then forward the listing to other friends to help fund the loan.
The borrower "is not being underwritten by traditional credit mechanisms," Akash Agarwal, GreenNote's founder and chief executive officer, said in an interview last month. "He is being underwritten by his social network. … This is the alternative to the alternative loan."
Unlike traditional channels for private student loans, "in our model, all students qualify," he said. "We don't ask for a FICO score or an underwriter or a cosigner."
And unlike some other P-to-P sites, GreenNote sets the initial rate for all the loans it arranges. That rate is currently 6.8% to match the Stafford federal student loan rate, Mr. Agarwal said.
Once a borrower's listing appears on GreenNote's site, prospective lenders can pledge to contribute toward the loan. Initially the listings can be read only by those who have been invited to do so, Mr. Agarwal said; GreenNote will make them searchable by anyone soon.
Lenders cannot request a different initial rate, but after the student begins repaying the loan, the lenders can arrange for the return to be lowered or even to turn the loan into a gift, Mr. Agarwal said.
The loan does not need to be funded for the full amount the student has requested; if at least $1,000 has been raised, the student and the school can elect to receive that amount, he said.
Students are not meant to rely on GreenNote alone to cover their expenses, he said.
GreenNote's loans are legally considered private student loans, so they should have the same protections in bankruptcy proceedings, Mr. Agarwal said. The check is made out to the school, not the student. "We want to work with the schools, because the schools know what the needs of the student is."
In March, Fynanz Inc. of New York launched a site that presents student loans as investments for strangers and uses elements of the student's credit history in its ratings of prospective borrowers.
Mr. Agarwal said the current student lending climate invites alternative systems, "because 20% of the traditional lenders have disappeared."
Edward Woods, a senior analyst for Celent LLC, a Boston market research unit of Marsh & McLennan Cos., said that in many ways GreenNote resembles Kiva Microfunds, which runs a microfinance site where lenders expect to make no interest and can choose to get back less money than they lent.
In other ways, GreenNote resembles Prosper Marketplace Inc., whose P-to-P lending site puts more emphasis on the rate of return, he said.
"Look at the world of Kiva, where it's totally philanthropic. Look at the world of Prosper, where it's part investment, part helping people out. This could be right in between," he said.
Though a student could set up a private loan from relatives and friends without a Web site, GreenNote's strength may be in persuading people on the fringes of a student's social network to help out if they feel they do not know the student well enough to trust that an informal loan will be repaid, Mr. Woods said.
"It's going to open up more people that are going to be interested in helping you," because "this is more official," he said. "I know where the money is going."
Mr. Woods agreed that there is opportunity for P-to-P student loan facilitators in the current lending environment.
Banks "are less able to lend, not because the borrower's any less credible, but because the credit environment has changed," he said. "You still have a group of consumers that need the loan, so you still have a market out there."
P-to-P lenders may have an edge, because individuals' generosity may outweigh their concern about a financial return, Mr. Woods said. As an individual, "my overhead's lower, and my need for profit as an ongoing concern is lower" than a bank's.
Menlo Ventures of Menlo Park, Calif. is one of the investors in GreenNote, whose management team includes veterans of JPMorgan Chase & Co., Capital One Financial Corp., Citigroup Inc., E-Trade Financial Corp., and Wells Fargo & Co. Bill Harris, the former CEO of Intuit Inc. and eBay Inc.'s PayPal Inc., is a director.