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Virgin Money’s Student-Loan Alternative

Virgin Group—best known for its airlines and music stores—has added Virgin Money USA to its roster of companies.

Yes, the brand that once brought you the Sex Pistols will now be managing personal and business loans. But don’t expect Virgin and its madcap chairman Sir Richard Branson to do lending the conventional way.

In May, Virgin Money bought a majority stake in–and rebranded–Circle Lending, a pioneer in peer-to-peer lending. Unlike Prosper and Lending Club, which mostly help strangers loan money to one another, Circle built its business around a classic taboo—lending money between friends and family.

Here’s how it works:

• Lender and borrower decide on the amount, repayment term and interest rate of the loan
• Virgin handles billing, repayments and tax documentation
• Borrowers pay a $9 per payment administrative fee (payments can be made monthly, annually or anything in between) and a one-time upfront fee starting at $99, depending on the type of loan

According to Virgin Money’s CEO, Asheesh Advani, the company will also begin offering its own student loans in the future. Advani wouldn’t disclose any information about how these loans will be structured, but he did get us thinking about how Virgin could help the college-bound and the massively indebted right now:

If you have a rich uncle who is sitting on money, why not have him fund your tuition rather than taking out a loan?

You’re likely to get an interest rate lower than a bank’s—loans made between family members and friends through Virgin have an average interest rate of 6%. Private student loans from banks and private lenders, on the other hand, have variable rates that can get as high as 19%. Meanwhile, your uncle gets to collect interest from a reliable source (that’s you) while earning more interest than he might in a money-market account.

Already sold your soul to a student lender? Have a family member pay down all of your debt now, so it doesn’t collect 19% interest over the next 25 years, then pay them back at a 6% rate for however long it takes to settle the debt.

There is another way to play this. Since parents are likely to get better rates on personal loans than college-bound kids with little or no credit history, get your parents to take out a loan at a lower rate from a bank and use Virgin to give them money for the loan payments. If they don’t trust that you’ll really cough up the money, just tell them that Virgin gives them the option of charging late fees, reporting you to a credit or a collection agency or forgiving a payment altogether if they’re feeling generous.

Some of the basic rules of Virgin Money loans—no limit on the repayment term (Prosper has a three year limit), interest rates that can be set at any percentage (even 0%) and loan terms that can be modified at any time during the life of the loan – offer a great deal of flexibility and lend themselves to something like student loans. The lender and borrower have complete control over the loan, which is key for people facing all sorts of uncertainty as they graduate college.

We don’t know yet if Virgin Money’s official student-lending arm will create some competition for the generally staid student-loan lenders operating today, but the friends-and-family lending service currently in place at least creates an alternative.

– Irina Aleksander