National Journal: The Online Lenders That Could Break the Payday Loan Racket
When Tara Richardson and her family moved into a new home recently, the cost of the professional movers put her over-budget. An elementary school teacher in St. Louis, Missouri, Richardson had taken out payday loans in the past to cover emergency expenses, but she was frustrated with the high fees associated with the short-term, small-dollar loans. So this time, she turned to a new online lender called Spotloan. Their loans, she found, were just as convenient as payday loans. But the interest rates were more reasonable.
Twelve million borrowers take out a cash advance known as a payday loan each year, according to the Pew Safe Small Dollar Research Project. Pretty much anyone who draws a paycheck can qualify for such loans. A good chunk of the $7.4 billion borrowed goes towards fees, which are how the lenders turn a profit. The typical payday loan of $300, due in two weeks, carries a $45 fee. That works out to a hefty APR of 390 percent.
A cohort of startups like Spotloan, LendUp, and FairLoan think they can provide people living paycheck-to-paycheck with a better source of credit. And they’re processing reams of personal data to identify reliable borrowers and create loan structures that they hope can guide people living on the financial margins into the financial mainstream.
- Safe Small-Dollar Loans Research Project