We've all seen and heard of payday lenders -- the institutions that charge astronomical interest rates for short term loans -- but one company is seeking to change the face of that industry, and perhaps all of banking as well.
Payday lenders like Cash America International are a necessary, but somewhat unnerving part of the financial system that provide loans to people who otherwise would not have the means, or perhaps even the desire, to secure a more traditional loan from a bank.
A July 2011 article in the Harvard Business Law Review by Nathalie Martin describes the process:
Payday loans are high-interest loans designed to help a consumer make it from now until her next payday. While the going rate is between 400 and 600% per [year], some payday loans exceed 1,000% per [year]. Most loans are rolled over time and time again, by lenders who encourage more lending at these rates whenever they can.
Lenders say they provide a valuable service to low-end consumers, particularly in an emergency, but study data show that the loans are most often used for non-emergencies, by people who have other low-cost or no-cost options. In states where payday lending is permitted, payday lenders are more common than Starbucks.
The article then goes on to describe how the problems go beyond simply a lack of access to traditional financial services and have deeper roots in the lack of understanding surrounding the true costs of the loans and the lack of transparency involved in the process. This is all compounded by the sheer amount of payday lenders that exist and the convenience they provide that makes them all the more popular.
While we may all bemoan the 19% annual interest rate charged by credit card companies, the reality is millions of Americans subsist on loans that charge 19% per week.
Yet there's one company not only seeking to change the reality of the need for payday lenders, but hoping to change the entire process itself.
LendUp, a San Francisco based start-up, describes itself as "a licensed, socially responsible direct lender," and has harnessed the power of the Internet, social connections, data, design, honesty, and Silicon Valley ingenuity in an effort to revolutionize they payday loan industry.
In short, while the company provides payday loans, it does so in a clear and transparent manner, letting customers know exactly what exact cost of the loan will be. Yet after the first loan (which a maximum value of $250) and subsequent repayment, it then offers its users the ability to complete a credit education course that outlines some of the basic principles of credit.
Along the way, the customers receive points for each step up the rung on the ladder. As the customers then move up the LendUp Ladder, it allows them to receive greater product offerings at better terms:
Interestingly, the company's website notes, "We created a loan that aligns our interests with our customers'. We succeed when they succeed, not when they get deeper into debt." In a recent interview, Sasha Orloff, LendUp's CEO noted the company doesn't do any consumer badgering or even charge penalties when customers are late on their repayment saying, "We don't do any of that... if they don't pay us back, we don't make money."
Why it matters
Currently, LendUp only offers loans in California, Louisiana, and Missouri, and many Americans will (thankfully) never be in need of any of the services they provide. The Motley Fool is a resource focused largely on public stock investing, and LendUp is a private company that individuals cannot buy stock in. So, you may be asking yourself why this all matters.
The financial industry has been recently characterized by the enormous missteps taken by countless firms and individuals leading up the financial crisis and mortgage meltdown. While it may be naive to suggest that a tiny San Francisco lender can change the industry, it's certainly an admirable place to see the seeds of change sown.
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