SoLo describes itself as a
“mobile lending exchange connecting lenders and borrowers for the purpose of providing affordable access to loans under $1,000”.
For borrowers, it is a great alternative to predatory payday or title loans.
SoLo is a no fee, and, technically, no interest way for a borrower to request a sum of money up to $1000. There is no limit to the amount that a Lender may loan. Although, you cannot be both a lender and borrower at the same time.
Tips
Borrowers have the option to include a ‘tip’ that will be above the original loan amount and serves as an incentive for lenders. For example, if a borrower is requesting a $200 loan, they may include up to a $20 (10%) tip to the lender as an incentive to choose their loan over the others.
Tips range from 0%-10% of the requested amount and the majority of loans are one month of less. You have the option to gift the amount to the borrower at anytime if you feel like giving away your money to strangers on the internet.
Deciding Which Loans to Fund and The ‘Solo Score’
There isn’t much data provided to evaluate different borrowers. On the home screen of the app you are presented with a list of potential borrowers. You are provided their First Name, Last Initial, their ‘SoLo Score’, and a note that the borrower can provide. The ‘Solo Score’, is misleading. It is not actually a credit score, and does not indicate their ability or willingness to repay a loan. They refer to it as a ‘social credit score’. They do not provide information on how they calculate the score, only that completing your profile and repaying your loans on time can increase your score. Most of the scores I've seen fall in the 40–60 range, with some outliers.
I have not observed any correlation between tip amount, credit score, or default rate… Caution.
There is no way to reliably know a borrowers repay-ability, therefore, I highly recommend always requesting the maximum (10%) tip amount if you do decide to invest.
Funding Loans and Payback
You connect your bank account from a list of pre-approved banks and fund each loan directly. It takes a few days to fund each loan and once it is funded it appears on a separate page displaying all of your currently funded loans.
The payback period for loans is generally 30 days or less, and it takes another week for the lender to receive the funds. If the borrower does not payback the loan they have the option to enter a two two week grace period plus a 5% fee on the original loan amount. If the borrower does not pay back the loan after the grace period, or declines the option of a grace period, you are presented with two options as a lender, Gift, or Send to Collections. If you decide to gift the loan, you are gifting the full amount of the loan to the borrower. If you send a loan to collections, the collections agency will attempt to collect the loan amount for 1 month. If collections is successful you will receive 70% of the loan amount. You are provided no visibility into the collections process.
Based on my research, the average tip amount is 9%. Lenders have the option to request an increase or decrease to the tip amount (up to a max of 10%) that the borrower may approve. I recommend increasing the requested tip amount on any loan you are funding.
If you are like me, you start running the numbers. A 9% ROI every month compounded over a year will more than double your investment. Let’s say you start by loaning $2,000, with an average of 9% each month, you would end up with over $5,000 by the end of the year, then $14,000 the next, and so on. Sounds great right? Even with a 10% default rate you are looking at healthy returns. However, the fairy tale ends there.
Based on my loans, the default rate for SoLo loans is approximately 33%, with an overall -27.04% ROI.
A 33% default rate is not acceptable in any SoLo investment scenario. 1 out of 3 loans went to collections.
I keep a log of all of my SoLo loans. I was planning to invest more but based on the default rate and unreliable SoLo Score, I have decided to stop. The link below has more details related to my loans.
https://docs.google.com/spreadsheets/d/19ZsS5N77IwUco4RsIGWnsaAknQE3LnESVZltfTB0Dro/edit?usp=sharing
Under no circ*mstances would I recommend SoLo funds as an investment vehicle. A 33% default rate makes it virtually impossible to achieve a profit and it is certainly not worth the risk. In my test my ROI was -27.04%. You are much better off putting your money into a savings account.This is why payday loans have such high interest rates and collateral requirements. The trap is thinking that SoLo is an investment platform in the first place. SoLo is an alternative to payday and title loans for borrowers, the main difference being, SoLo offers almost no penalty to a defaulting borrower and requires no collateral.
If you still wish to give it a shot I suggest you come with the mindset that this is an act of charity that helps borrowers avoid predatory loans, with the understanding that you, the lender, are now the Prey.
You may also be considering services like Lending Club and Prosper. They are similar peer to peer lending platforms. I do not have an article written for those yet, but I am currently liquidating/removing all of my assets from both. Over the course of 4+ years my return has been 0.45% for lending club and 3.46% for prosper. I would have performed better keeping the money in a no-risk savings account.
For a less risky and more traditional approach to investing I would recommend Betterment and Wealthfront (disclosure: referral links). They are automated robo-investing tools that allow you to assign a level of risk and investment preference and it automatically manages the money for you. I currently use both services and am happy with the results so far. I have seen slightly better results with Wealthfront, and they manage your first $5,000 for free.
