How risky is Fynanz?

Fynanz is a highly targeted P2P lending site. It only lends to students for student loans.

As a lender that has somewhat soured on the concept of P2P lending in general (see my "Loans that disappoint" post), I've learned that I cannot really trust what people say when they apply for a loan. However, in the case of Fynanz, I know what the loan is purportedly for. As I understand it, the team at Fynanz reviews the loans to make sure that the person is actually a student, does need the money for the purpose(s) indicated and the loan falls under the general classification of an "education loan."

The risk of education loans (even private education loans) defaulting has been studied more extensively than the risk of P2P loans defaulting. When Prosper started out, they (and us) had no idea what default rates would be like - Prosper quoted Experian rates for consumer credit that soon proved grossly over-optimistic.

In the case of education loans, there seems to be a large body of work already in existence.

Mark Kantrowitz created FinaAid as a public-service reference site for student financial aid information. There's an extensive discussion (with references to academic and peer-reviewed papers) about default rates in educational loans. Scroll down the page till you get to the section titled "Default Rates." There's a bunch of information there, as well as links to source material and government-supplied data.

Worth noting is the following summary:

Two-year and proprietary institutions tend to have the highest default rates, more than twice the default rates at four-year, public, and private non-profit institutions. Graduate and professional students have among the lowest default rates, about half the average.

Private student loans tend to have long-term default rates that are about half of the default rates on federal education loans, partly because they exclude most borrowers with credit scores below 650. The federal government lends to a riskier population of borrowers because the government is focused on enhancing access to higher education, while private lenders are focused on profitability.

That seems to spell out a clear strategy for prospective lenders lenders on Fynanz. It also seems to imply that Fynanz (being a supplier of private student loans) could expect default rates as outlined in the first sentence of the second paragraph quoted above.

If that is not enough, then here is a review of student loan default literature by the Texas Guaranteed Student Loan Corporation. Lots of meat.

Seems to me that overall the risk with student loans is better defined than the risk with P2P lending in general.