Our Take on the Payday Loan Industry
We are dedicated to facilitating a conversation about the future of short-term, small-dollar credit, and we welcome your thoughts at [email protected]
Who takes payday loans?
The following is a case study based on recent research by the Center for Financial Services Innovation.
Like millions of Americans, Pamela* lives paycheck to paycheck, and doesn't have a good credit history. She is a responsible person and works diligently to meet her expenses each month. But just barely: when her car has trouble, the restaurant where she works is slow, or all the bills are due just before her next payday, she just doesn't have the money to cover it.
Without a good credit history, she can't get a credit card, and banks won't lend to her, because she's deemed too risky. She could just let the electricity bill go overdue, but that could further damage what little credit history she has, and it'll cost even more to pay the late fee and have the power turned back on.
For Pamela, and millions of middle-income Americans like her, a payday loan is an option for helping her stay afloat until her next paycheck comes in.
* Pamela is a persona based on Know Your Borrower: The Four Need Cases of Small-Dollar Credit Consumers, a report from the Center for Financial Services Innovation, and insight directly from LendUp borrowers.
What are the options?
When choosing a lender, Pamela has two options. Payday lenders and the potential pitfalls that come with them, or LendUp - a loan-matching service.
Potential Pitfalls
- Debt traps: Rollovers are a way for lenders to make money on borrowers without means to repay their loan. Here's a definition from the CFPB.
- Opaque terms: Lack of clear disclosures make borrowers less likely to repay on time. Lenders don't mind; they profit from the hidden fees.
- The same high rate forever: Responsible borrowers pay the same fees as those who never repay. Month after month. Year after year.
- No customer protection:: When lenders avoid regulatory scrutiny by incorporating outside US law, the customer loses rights and protections.
LendUp Solutions
- More options! LendUp provides more options to choose from that puts you in control. We don't make money when things go wrong. Instead, we work with you to provide a solution.
- Clear terms: We want to encourage responsible borrowing. We make long-term relations with our cusomers when they get the loan they can afford and pay back, not get deeper into debt cycle.
- Licensed direct lenders: We are proud to be partnered with the proven and trusted direct loan lenders who comply with all state and federal regulations, because that's how we can offer customers the best protections.
After considering her options, Pamela chose to borrow with the help of LendUp.
How can LendUp afford to offer all these benefits?
We are committed to improving the lives of our customers, so instead of charging higher rates, we create efficiency elsewhere. We have a transparent business structure and are able to provide more options to borrowers if compared to approaching a lender directly. We save money on rent by operating online. We could charge more if we wanted, but we're invested in creating a secure financial future for all.
How our lenders make credit decisions
We and our lenders believe traditional credit bureaus don’t always give a complete picture of creditworthiness - particularly for borrowers with damaged or limited credit histories. Therefore, the lenders we work with consider other factors when evaluating each application, such as income sources and bank statements.
To further empower our customers, we built one of our credit education courses to specifically teach the importance of and mechanisms for correcting inaccuracies in bureau data.
How we invest in the future: Credit education and the opportunity to build credit (where available)
Better loans are important, but our customers need more. They need access to and an understanding of different types of credit, and we help them with both.
We want to empower our customers to take control of their financial lives. Our credit education videos explain the key tenets of financial literacy. They are distilled into understandable chapters and focused on practical advice. We incentivize our customers to learn more.
And our goal is to improve our borrowers' credit scores.
Let us know what you think.
We’re proud of what we’ve created to date and we’re still learning how to do this better. Let us know what you think and write to us at [email protected] to get a conversation going.