Rainy Day Capital, LLC announced today the beta launch of its website, rainyday.org, which relies heavily on social media and networks to create an inexpensive alternative to payday loans.
The microlending site will provide short-term access to as much as $1,000 with no interest or fees for five days, up to four times a year.
"The inspiration for Rainy Day was the single mom working two jobs whose car breaks down, and there isn't enough money left in the checking account this month to get it out of the shop," said Hayden Hamilton, founder of Bright Light Ventures, the innovation incubator behind Rainy Day. "The goal is to create a rainy day fund for those who can't afford to create one for themselves."
In order to provide loans that are free to begin with, and then at rates a fraction of the 391% APR interest rate of an average payday loan, Rainy Day uses many of the practices pioneered by the microfinance industry making unsecured loans to low-income women and families in countries like Bangladesh, but Rainy Day uses social networks rather than village networks to do so.
Rainy Day requires a Facebook account to apply for a loan and relies heavily on the recommendations of current Rainy Day members when making a decision on new applicants. Members are also tied to the applicants they recommend, giving them additional benefits like lower fees when the applicant repays their loan on time, but slowing or even reversing those benefits if the applicant does not.
Rainy Day's fee structure is very different than other short-term lenders. Rather than charging a relatively large fixed fee upfront, Rainy Day charges a daily fee. Fees begin at $2 per day and decrease with every subsequent loan as a borrower demonstrates a repayment history. The structure was designed to encourage early repayment and provides borrowers with the opportunity to take loans at a small fraction of the typical industry rates, or even for free.
Default losses are by far the biggest expense for online lenders, often running in excess of 100% APR, or more than 100 times that of the microfinance industry. By reducing those losses, Rainy Day can provide much lower rateswer rates for borrowers.
Rainy Day launches its public beta site today in three states - California, Louisiana, and Tennessee - and hopes to make the services available in many other states later this year.