A Free Market Alternative to Payday Lenders

sasha_orloffby James A. Bacon

Most everyone recognizes that payday lenders create a poverty trap for poor and working class Virginians. While the lenders do provide a valuable service by extending short-term loans for emergency situations, the annualized interest rates are extremely high, and borrowers often find themselves rolling over their loans from month to month at considerable expense. On the other hand, half the U.S. population has a FICO score below 680, meaning they can’t be approved for credit by most banks. Say what you will about payday lenders, they aren’t as bad as Vito the Loan Shark. Even payday lenders don’t break borrowers’ kneecaps when they fall behind on their payments.

That’s why I have always opposed legislated restrictions on the lending of payday lenders. Taking away poor peoples’ only credit alternative, as unpalatable as it may be, may satiate the outrage felt by crusading social reformers, but it doesn’t actually do the poor people any favors. If the social reformers want to help, I have long suggested, perhaps they should get into the business themselves and provide a better deal.

Well, it appears that someone is doing just that.  LendUp, a lending institution backed by Silicon Valley money, has introduced a new approach to extending credit to the poor. The company came to my attention because it is opening an East Coast office in Chesterfield County to serve Eastern and Central time zones. The description provided by the Richmond Times-Dispatch article and the company website shows how the combination of innovation and competition is the best social reform one could ask for.

“We started LendUp because the traditional banking system wasn’t working for more than half of Americans and the payday market was fraught with abusive practices,” LendUp CEO and co-founder Sasha Orloff said in a statement. The RTD explains how the company works:

The company provides short-term loans to consumers with low credit scores through its LendUp Ladder product….

The process is handled entirely online — not at a store like most payday lenders operate — and decisions are usually made within five minutes, the company said on its website. If approved, consumers could have money in their account in about 15 minutes.

The company offers a single payment loan of between $100 and $250 that has to be repaid in seven to 30 days. It also offers an installment loan of between $260 and $500 that requires two payments and a credit check.

Annualized interest rates still can amount to 250%. LendUp offers the same justification as payday lenders: “Some customers do not pay us back and, like insurance, the interest covers what we lose.”

The difference is that LendUp allows borrowers to earn points to get larger loans at lower interest rates over time by making on-time payments, taking free financial education courses and referring friends to LendUp. The business model is built upon improving borrowers’ financial literacy, helping them build their credit scores, and ultimately charging them lower rates.

Ironically, although LendUp is locating its East Coast office in Virginia, the Old Dominion is not one of the states listed on the company’s website where the service is offered. The RTD article offered no explanation why that would be. Perhaps the company has more regulatory hoops to jump through here. If the social reformers want to accomplish some good, perhaps they could lend LendUp a hand.

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14 responses to “A Free Market Alternative to Payday Lenders

  1. Are typical pay-day loan customers truly the same as typical Lend-up customers?

    ” To apply, you’ll need an active checking account, a phone that can receive calls and a valid email address. You can apply from your smartphone, tablet or computer. Make sure you’re using a secure Internet connection, not public WiFi, so that your sensitive personal information can’t easily be stolen. Then provide your name, address, Social Security number, birthdate and mobile phone number. You’ll also need to provide information about your employment and income. The application then asks for your checking account number and the bank’s routing number for the account where you want your loan proceeds deposited.”

    Investopedia http://www.investopedia.com/articles/personal-finance/040715/lendup-responsible-alternative-payday-loans.asp#ixzz4ILHXHysC

    I was under the impression (perhaps wrongly) that most payday loan folks were unbanked… (did not have bank accounts) nor much of a credit history.

    no?

    this sounds like it’s up a level from payday loans.

    and I still don’t understand how you justify support for payday loans when at the same time you admit that such loans will end up harming many of the borrowers… spiraling them down into deeper troubles…

    we support regulation to protect consumers from being harmed by – say insurance that is a ripoff or cars that are lemons for people who have money … we don’t allow such predatory scams on people that do have some money but we allow it on the more vulnerable as an “alternative”? Perhaps we might say sketchy insurance and cars are also “alternatives” to folks, eh?

    we seem to have different regulatory philosophies depending on whether the customer is poor or not.

  2. Two points:

    First, why is this “free market alternative” so wonderful? Predatory pay day lending IS the free market ON STEROIDS..

    Secondly, “Vito the Loan Shark?” Caricature of an Italian-American? How about “Nelson Biddle IV,” caricature of a WASP loan shark?

    That type was probably more prevalent in the ripoff years after the 2008 crash.
    Why do you always assume that non-WASPS are somehow always less ethical? Kind of reminds me of your “We come in peace,” with the space alien and the sombrero. A lot of Latinos really went for that, I hear.

  3. Larry is right. The requirements of Lendup eliminates many/most payday borrowers. Own a computer and go through technical hoops?

    So Lendup gets to charge 250% to people who may not be getting payday loans so the number of people paying these rates may actually increase. Not much of a service, but if you label yourself as doing this to help the poor, then apparently you can get away with this.

    Now if some of the huge “charitable” foundations were willing to use some of their money for truly low cost loans to the poor, maybe some good could be accomplished. Don’t hold your breath on that happening.

    • Too many nonprofits prefer to engage in, or fund, advocacy, rather than help people. If it were up to me, any entity that had or funded a paid lobbyist would have its tax exempt status removed.

      John is right; there is no reason why “charitable” foundations cannot step in and offer “truly low cost loans” to the poor. Except maybe they fear losing money. Or they prefer to lobby or fund lobbyists.

  4. whether or not a charity decides to help the poor with loans is still not justification for the govt to allow predatory practices against the poor , when they have laws and regulations against predatory business practices that affect the middle class.

    Jim was just recently complaining that he was expecting the govt to protect him from his insurance company “jacking up” his “rates”! but no such concern for the folks who can’t even afford insurance!

    Lendup appears to be an modern-day internet version for folks a notch or two up the financial scale (the underbanked) in that it requires a bank account which many do not have.

    looks like 18% of households in Va are considered underbanked and 8% unbanked.

    ” The FDIC defines the unbanked as
    households that lack a checking or savings account
    and the underbanked as households that “have a
    checking or savings account, but rely on alternative
    financial services,” such as non-bank money orders
    or check cashing, payday loans, rent-to-own
    agreements and pawnshops.”

    http://www.pewtrusts.org/~/media/assets/2011/10/26/50states_web_full.pdf?la=en page 49

    That’s households and I suspect that number is higher in some places than others….. rural and inner city.

    • Jim was just recently complaining that he was expecting the govt to protect him from his insurance company “jacking up” his “rates”! but no such concern for the folks who can’t even afford insurance!

      Larry, that is not an accurate summary of my blog post. (But what else is new?) After examining in some depth why New York Life increased my long-term care rates and discoursing on the State Corporation Commission’s role in regulating insurance, I wrote:

      “Well, a look at my insurance policy indicated that, sure enough, New York Life was entitled to raise my fees. My bad. I should have read the fine print.”

      And then I wrote: “I have no doubt that there is a delicate balancing act between protecting policy holders and ensuring insurers’ solvency. If you’re worried about policy holders getting the shaft, nothing could be worse than allowing a carrier to slip into insolvency unable to make good on any of its promises. I also recognize that regulators had no more experience than the carriers did when launching a brand new insurance product, so it was difficult to second-guess industry decisions. So, I’m mildly sympathetic to the position of the regulators, who have made appropriate adjustments over time.

      “However, it strikes me that something was severely askew with rules that resulted in insurance carriers in Virginia under-pricing 57 long-term care policies and, judging by the lack of any filing to lower rates, for zero to over-price them. I can assure you that the insurance agents selling these policies did not inform policy holders, “Gee, we’re really not very experienced at setting rates, and our assumptions could prove invalid, and if they do, we have the right to jack up your rights as much as we need to.”

      “The state of Virginia provides state tax credits for long-term care insurance premiums. The idea is to encourage Virginians to protect their retirement assets rather than fall back upon Medicaid to pay for their care. Some 80,000 Virginians went along, playing by the rules and doing the right thing. In the end, the insurance companies were protected from their mistakes, the federal government got rock-bottom interest rates that allowed it to continue running huge deficits while depressing insurance company portfolio returns, and thousands of Virginians got stuck with higher premiums. Their choice: either drop out and lose the money they have paid in, or suck it up and eat the new rate. Is there any wonder that Americans believe the system is rigged in favor of the powerful against the little guy?”

      Yes, I concluded that there were flaws in the way long-term care insurance was launched in Virginia, but that is very different from insisting that the government had some obligation to protect me from the insurance company raising its rates. Please take greater care to not misrepresent my views.

      • well I do not think I misrepresented your position – read on

        you also said this – which you neglected to add to the above:

        ” Where was Virginia’s State Corporation Commission in all this?

        New York Life is hardly the only insurance carrier to ask for higher rates. The Bureau of Insurance has approved 22 rate increases by 12 different companies affecting nearly 16,000 policy holders. Another 35 requests affecting 65,000 policy holders are pending. Two companies are asking for 121% rate increases — more than double!”

        and what I said was this: ” Jim was just recently complaining that he was expecting the govt to protect him from his insurance company “jacking up” his “rates”! but no such concern for the folks who can’t even afford insurance!”

        I think I made a fair comment and did not represent your position at all as you went on below that comment to a long commentary about the govt and how it regulates insurance and your view – that it was needed.

        I think if folks read the entire blog post – they will see that you clearly expect the govt to regulate insurance instead of letting it conduct itself as a “free market” as you advocate for others who use other business services.

        if folks read that commentary and believe I have misrepresented your position – I will apologize but if not I might expect you to do some further “splaining” about how you think the govt SHOULD regulate some services like insurance but not other like payday loans! Or maybe you could do some commentary on that subject… and further outline the difference in why you support regulation for some financial services and not others.

        how about it?

  5. So we better do what New York Life wants or NO ONE will have insurance. Didn’t read the fine print? What is this crap?

  6. “Please take greater care to not misrepresent my views.”

    You’re joking right?

    Larry the Great?

  7. Perhaps a blog entitled “Free Market for others, Govt Regulation for me”?

    😉

    so ..sometimes it seems like a continuing theme here in BR.. just saying….

  8. Payday loans do not “create” a poverty trap. Poverty is a trap that you’re already in well before you enter a payday loan shop. You’re already getting paid below the cost of living to where you need a small loan before payday. And banks and other conventional financial services avoid you like the plague. By saying payday loans are the cause, you are missing some very basic realities about poverty. The poverty trap is what sends people to payday loans, not the other way around. Get it right!

    • Actually, I agree with you, and I have defended payday lenders in previous posts. The fact is, poor people have fewer alternatives than better-off people. Taking away the payday lending option does not make their lives any better, it only forecloses one of the few options they have. That said, it is well documented that some borrowers do get caught on a debt treadmill with payday lenders, and I applaud any entrepreneur who can come up with a better option. That’s what free markets are all about.

  9. so the state should not be regulating insurance and instead be letting it operate “free market”?

    that argument is actually made for health insurance, right?

    so get the government out of regulation (which folks say increases costs and take jobs) of insurance and let the free market determine the product and it’s costs to customers?

    I keep hearing a double standard here where it’s the “free market” for others like the poor but not for folks higher up on the scale who should be protected by regulation.

    It does not matter if people are “already poor” as to whether or not they should be accorded similar levels of regulation – on the same basis that we justify for the non-poor.

    A good thread would be one in which Jim opines about why regulation is needed for – say long term care insurance but not health insurance … or for bank and credit card loans but not payday loans.

    where do you make the distinction?

  10. How about the epipen issue? That seems like a good discussion for the free market.

    should that company market Epipen the way it wants to in a free market or should the govt intervene?

    ” Mylan took over rights to EpiPen, a pair of syringes cost $93.88. … Mylan raised the price 5 percent in 2008 and 2009, when a competitor hit the market. Its price jumped 20 percent in late 2009, followed by a series of 10 percent and 15 percent increases. The price hit $609 per pair in mid-May.

    Q: How can Mylan do that?

    A: In the U.S., drug manufacturers charge what they think the market will bear. Unlike other countries, the U.S. government doesn’t regulate drug prices, though the Veterans Affairs and Medicaid negotiate big discounts.

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