When asked if they’d be able to cover a $400 emergency expense, Neal Gabler’s recent Atlantic cover story noted, nearly half of all respondents to a 2014 Federal Reserve study said that they wouldn’t have enough cash on hand.
So how would they scrape the money together? Most told the Fed they would try for a bank loan, use a credit card, or make a potentially embarrassing request to family and friends. Two percent of respondents said they would take out a payday loan.
To avoid this suite of unattractive choices, some borrowers are asking strangers for money on Reddit instead. Since 2011, a section of the site, r/borrow (and its predecessor, r/loans), has matched users looking for quick credit with lenders willing to put up cash. Most loans on r/borrow charge very high interest rates—usually between 10 and 25 percent, to be paid back over weeks or months. Per data collected by one r/borrow user, the subreddit facilitated 3,473 loans totaling over $780,000 in 2015. According to a moderator of the subreddit, r/borrow users, like Redditors at large, skew young, white, and male. Loans tend to range from $100 to a few thousand dollars, and cover the gamut of emergency financial needs, including car repairs, debt consolidation, medical bills, or unexpected travel costs.
Relatively speaking, these aren’t huge numbers—the consumer-credit market handles trillions of dollars each year—but they do highlight the ways in which traditional lending options can fail to give some people what they need. “It’s not surprising that borrowers are looking for alternative ways of getting access to credit,” says Paul Leonard, the former director of the California office of the Center for Responsible Lending.
When Americans need money, they often turn first to banks for a loan, but their options there are only as good as their credit. If their credit score—a figure that can be calculated incorrectly and yet is often taken as the sole indicator of a prospective borrower’s reliability—is low, they often turn to loans with much higher interest rates. Take Justin O’Dell, a cable technician living in Dexter, Michigan. He says his mother took out several credit cards in his name while he was in college and racked up about $40,000 in debt. “My choices were to press charges for credit fraud or eat the debt,” he said. “I ate the debt.” No longer able to get student loans, O’Dell was forced to drop out of college.
When O’Dell later needed some cash to pay his cellphone bill after his wife lost her job, he briefly considered a payday loan—an extremely high-interest alternative that is known to catch consumers in cycles of debt and is mostly unregulated in 32 states. (Payday loans are not equal-opportunity debt traps, either: “There is some evidence that lenders have concentrated themselves in communities of color,” said Joe Valenti, the director of consumer finance for the Center for American Progress.) But after deciding against that option, and against the embarrassment of asking his father, O’Dell ultimately opted for the comfortable distance of a Reddit loan. “You don’t have to walk back to dad with your tail between your legs and ask for help,” he said. Now, he turns to Reddit when surprise expenses arise.
On r/borrow, loans are being granted to the tune of $20,000 per week, according to user-collected data, and part of the platform’s success lies in its anti-establishment appeal. Lenders and borrowers alike are fond of the way that r/borrow takes lending out of a cold, institutional paradigm. O’Dell compared it to other personal-giving subreddits, such as r/secretsanta and the “Random Acts Of” forums, where users gift strangers with pizza, books, crafts, and even sex. “The nice thing about it is that you’re dealing with another person,” he said.
(Naturally, there are a few silly loans given out on r/borrow. In February, one user asked for a $20 no-interest loan to pay for a pizza that would feed him for a few busy days. As the loan was negotiated, commenters harangued the requester for not choosing more budget-friendly meals. Still, the loan was funded.)
A small group of r/borrow lenders make a majority of the page’s loans, and often earn significant profits. Kevin, a San Francisco software engineer who asked to be identified by first name only, says he has made around 400 loans totaling $100,000—he says he earns about $3,000 a month from r/borrow. Kevin said that he’s mostly in it for the money, but his longstanding interest in Internet communities has shaped his participation as well. “As a teenager in the 2000s, I grew up participating in tight-knit internet forums and made lifelong relationships with strangers I only knew as a nickname online,” he said in an email.
But one reason why r/borrow’s loans come with such high interest rates—which in turn explain why users like Kevin can profit so handsomely—is that the subreddit has no legally binding enforcement mechanism. No contracts are signed, no collateral is requested, and no credit reports are pulled. Any Reddit user with an account three months old and a modest posting history is considered more or less eligible for a loan.
The primary consequence for failing to repay is an unsightly red post tagged “UNPAID,” which is recorded by LoansBot, a script that stores users’ lending history. In other words, borrowers have an opportunity to take lenders for a ride at the risk of little more than not being able to borrow on Reddit again. Lenders have little recourse—it’s difficult to break someone’s kneecaps over the Internet, and there is no evidence that any r/borrow lender has used threats to collect an unpaid debt.) And yet, the system mostly works. Of the roughly 60 percent of loan requests that are funded, 70 percent are repaid. By comparison, a 2015 study by the Center for Responsible Lending found that 46 percent of payday-loan borrowers default within two years of their first loan.
In order to protect their investment, lenders sometimes ask first-time borrowers for a link to their Facebook profile and a photo of themselves holding a form of ID (sometimes while striking a unique pose, a tactic that helps keep scammers at bay). A Reddit comment history is also important. One moderator, who asked not to be named because he didn’t want his activity on r/borrow to be associated with his marketing business, told us that users who post on drug-related subreddits, for example, are less likely to get loans. “Different lenders have different criteria, but almost everyone looks at your Reddit history,” said Kevin, the software engineer.
Tavares Allen, a civil engineer living near Pittsburgh who has taken out loans 25 times using r/borrow, posts frequently to Reddit forums on cooking, music, and baseball. “Teemunney has been my username for everything on the Internet,” he said. “I don’t want to delete it and come up with another.” He added, “I can’t take [money] and run,” he said. Allen has repaid every Reddit loan promptly, and says that now, when he makes a post requesting a loan, he gets multiple responses in minutes. “If my credit score were based solely on my Reddit post history, my score would be over 800,” Allen said.
r/borrow depends on 10 somewhat overworked volunteer moderators, who are tasked with identifying scammers and predatory lenders, enforcing posting protocol, and maintaining LoansBot. The moderators’ oversight is important, but they can only do so much to ensure loans are paid back. The moderator we talked to said that he has banned some “nakedly predatory” lenders, who were demanding interest payments that exceeded 100 percent.
If a loan falls through, it’s often difficult for lenders to recoup their loss. Some r/borrow lenders have been known to contact a borrower’s friends and family through Facebook. In some cases the relatives of users who default on a loan have wound up repaying on their behalf.
r/borrow isn’t the only option that has sprung up as an alternative to the usual ways of getting money on short notice. LendingClub and Prosper are two bigger-name startups that link individual borrowers with individual lenders, though not as directly as on r/borrow (and they take a cut of the money exchanged). There’s also Puddle, a platform in which groups of users pay into a fund that they can borrow from when they need a cash boost, and Oportun, which is accessible from inside Latino supermarkets in California, Texas, and Illinois, and offers payday-style loans, but with longer repayment terms. And the city of San Francisco runs Payday Plus SF, which partners with local credit unions to provide short-term credit at lower interest rates than many payday loans.
“Our best users have credit scores under 650,” said Skylar Woodward, the CEO of Puddle and a co-founder of the microfinance group Kiva. “People who the current system says are untrustworthy or high-risk actually are repaying at over 95 percent.”
While r/borrow and even these full-fledged companies remain on the fringes of consumer lending, the notion of directly matching individual borrowers and lenders could transform the financial industry in time. Today, the intermediary between borrowers and lenders is most often a bank, and banks, in exchange for providing this service, take a cut amounting to more than $1.5 trillion per year. So, one of the promises of peer-to-peer lending, on a larger scale, is that it could greatly reduce banks’ roles as intermediaries, and pass on the savings to borrowers and lenders alike.
While banks still remain the public’s (and the government’s) favored lenders, these new peer-to-peer companies and initiatives, for the most part, have the implicit or explicit approval of regulators. According to Lauren Saunders, the associate director of the National Consumer Law Center, the Federal Trade Commission has general authority to regulate unfair or deceptive lending practices, and for lenders making more than 25 loans in a calendar year, so does the Consumer Financial Protection Bureau, which is in the process of developing a new set of regulations requiring that payday lenders, among other things, evaluate borrowers’ ability to repay loans. Anyone making more than 25 loans a year is also required to disclose the loans’ interest rates, according to the federal Truth In Lending Act.
In 2008, Prosper and Lending Club both briefly shut down (Prosper did so because of a government cease-and-desist order) in order to register with the Securities and Exchange Commission, but the legality of an informal lending network like r/borrow has never been tested. “If this is a large and thriving marketplace, at some point it seems as though it would run afoul of at least state, if not federal, regulations,” said Leonard, formerly of the Center for Responsible Lending. “There’s a whole set of laws and regulations around the collecting of debts, and what you’re allowed to do, what you’re not allowed to do, how you’re allowed to contact people.” For example, while the r/borrow rules page tells lenders to abide by state-level interest-rate caps, this rule is not stringently enforced.
It’s not clear what this means for the future of r/borrow. But emergency lending, even if it were perfected, would remain the symptom of a bigger problem. “Some of the challenges that people are facing involve looking to credit when credit is not really the answer,” Valenti, of the Center for American Progress, said. In addition to holes in the social safety net and health-care system, “some of it can be traced to the minimum wage not being sufficient and not keeping up with costs for folks,” he said. So, for the time being, despite high interest rates and an absence of official protections, a small set of borrowers see an ad-hoc Reddit network as their best option for emergency cash. “It’s interesting, and a little bit troubling, that people are heading in this direction,” Valenti said.