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.