CommonBond Obtains $150 Million in Boom for Online Lenders

Money is pouring in at online-lending startups.

CommonBond Inc., a New York-based online student-loan company, said Thursday that Nelnet Inc. invested an undisclosed amount, while providing at least $150 million to finance more loans. CommonBond Chief Executive Officer David Klein said the deal builds on more than $100 million that it had previously garnered from investors including former Citigroup Inc. CEO Vikram Pandit, and Social + Capital, a Palo Alto, California-based venture capital fund.

The agreement is a “smart way to diversify funding capacity,” Klein, who co-founded CommonBond in 2012, said in a phone interview. He declined to comment on CommonBond’s valuation.

CommonBond is the latest online lender to gain more funds, following the initial public offering in December of LendingClub Corp., which helped pioneer the market for peer-to-peer borrowing.

San Francisco-based Social Finance Inc., known as SoFi, this week raised $200 million at a valuation of $1.3 billion from investors including Third Point Ventures and Wellington Management Co. Last month, Earnest Inc. raised $17 million in financing to explore the development of new online products including car, home and student loans.

Bank Alternatives

The online lenders are challenging banks, which dominate the loans industry. The startups said they typically offer loans at lower interest rates than banks because they can save costs by being online and can reduce risk by gathering more data on borrowers and filtering out those most likely to default. American Banker named online marketplace lending the innovation of the year in 2014.

“These guys provide an alternative to traditional banks, which are not flexible and, following the financial crisis, are more focused on the regulators than on the consumer,” said David Lister, a former structured finance banker at Credit Suisse Group AG in New York, who advises online lenders. “They’re disrupting the traditional players, creating more choice, cost savings and a better overall experience for the borrower.”

Student loans are a ripe area for the startups. The climbing cost of college has helped swell total student debt to almost $1.2 trillion, with the federal government holding or backing more than $1 trillion of that amount, the U.S. Consumer Financial Protection Bureau said last year. More than 90 percent of all loans for the last academic year were government backed, according to the College Board.

SoFi, started in 2011, has so far originated $1.75 billion of loans and expanded to provide mortgages and personal loans. CommonBond has financed $100 million in student loans through the end of 2014, with Klein projecting that loan generation will reach $500 million this year and $1 billion in 2016.

CommonBond said it saves borrowers an average of $10,000 over the life of a 10-year loan, while SoFi said it saves borrowers $11,783.