A Better Model for Lending to the Poor

LendUp office in Chesterfield County. Photo credit: Richmond Times-Dispatch.

It’s time to introduce into the public lexicon a distinction between “social justice warriors” and “social justice entrepreneurs.”

Social justice warriors (or SJWs, as they are known short-hand on some conservative blogs) seek to remedy the conditions of the poor and downtrodden through political action, typically calling upon government to wield its power and money to fix some perceived institutional wrong.

Then there are social justice entrepreneurs. Instead of seeing government as the answer, they look to private action: creating new business and not-for-profit models to help the poor. The entrepreneurs don’t agitate, they don’t wave placards, and they don’t frequent protest rallies. They go out and change peoples’ lives for the better.

Regular readers of this blog know that I have no patience with SJWs, most of whose “remedies” are counter-productive, if not outright destructive. By encouraging the poor to buy houses they can’t afford, take out higher-ed loans for degree students never complete, and shutting down lenders-of-last-resort like payday lenders, SJWs have worsened the plight of the poor — all for the most noble of motives, of course.

California-based LendUp Global Inc., is an example of a social justice enterprise that has the potential to help ameliorate the lives of millions of poor people — without a single dollar of government funding. The company, which has established its first East Coast office in Chesterfield County, was recently profiled by the Richmond Times-Dispatch. I base the following account upon that article.

Sasha Orloff had worked in finance, including an internship at the Grameen Foundation, a global nonprofit co-founded by Nobel laureate Muhammad Yunus that provides micro-financing for poor people in developing countries.  His experience there inspired him and his stepbrother Jake Rosenberg, who had worked in technology at Yahoo! and an online gaming company. They conceived the idea of tapping the emerging FinTech industry to make small loans to an estimated 100 million Americans, mostly poor with low credit ratings and income volatility, who cannot get loans from traditional banks. In early 2016, LendUp raised $150 million in venture capital with the goal of becoming a better small-loan provider.

As with payday lenders, LendUp’s interest rates are extremely high on small, short-term loans. A $250 loan repayable within a month would carry a finance charge of $44, equivalent to an annualized interest rate of 214 percent. Interest payments must cover the transaction costs of making the loans, after all. They also reflect the increased risk on non-payment by low credit-score borrowers. 

As Rosenberg acknowledges, “There is a subset of the population that actually needs payday loans, and for this population, banks cannot readily serve them for a wide range of reasons.”

“Yes, payday loans are expensive. The real problem is there is no other options,” he says. “The average borrower is getting ten [payday loans] a year, and they have no pathway to a better product. The key thing is, we’ve tried to create a model where we win when the customer wins. … We do that by trying to incentivize behaviors that are constructive to the consumer’s financial life. If they do those things, they get access to more, the cost goes down, and the amount of capital they can get goes up.”

LendUp offers customers a “ladder” out of the indebtedness trap. The company provides financial, advising customers on how to improve their credit rating and qualify for lower cost debt. Borrowers can win points by paying back loans on time. As they prove themselves, they can work from payday-like loans to installment loans of up to $1,000 with lower interest rates.

Earlier this year, LendUp passed the $1 billion mark in loans provided. It has made more than 3.5 million loans.

Time will tell if LendUp has a profitable business model. But if it does, it should have no trouble attracting capital and expanding. Most likely it will attract competitors, and it will push the payday lending industry to reform itself — either develop a better business model or get dismembered by new tech-savvy, FinTech enterprises.

Interestingly, although LendUp’s East Coast operation is based in Virginia, the company does not offer loans in the Old Dominion. The article does not explain why, but don’t be surprised if there are regulatory restrictions inspired by do-gooders trying to protect the poor from predatory lending.

There are currently no comments highlighted.

3 responses to “A Better Model for Lending to the Poor

  1. Often regulatory restrictions to entry into a particular business are imposed by those fearing competition….the consumer protection angle is sometimes a cover. Shocking, I know…

  2. A cursory search indicates that these folks are doing an online-only business model and that they have been in trouble with regulators over deceptive advertising including the “ladder” idea…

    I think using the term “social justice” in connection with any loan company specializing in loans to those with poor credit is risky business… unless they have a bulletproof reputation for doing what they claim they are doing with regard to credit counseling and helping folks improve their credit scores.

    If those claims are not being met – they are going to get classified as just an online version of predatory loan sharking.

    But, here is the bottom line in my view – people with poor credit records should be penalized on the cost of borrowing… just as anyone else would be … i.e. your credit score influences all manner of financial transactions from the cost of a loan to whether you can get a credit card to even what you pay for auto or other insurance.. all of these things are on the table for all borrowers including those who are “poor”.

    What should NOT be on the table is discrimination with respect to consumer protections on credit. Everyone should benefit from the same protections and the poor should not be stripped of those protections just because they have “bad credit”… that IS predatory…

    People who are poor and have bad credit – do suffer from a system that honesty categorizes them in terms of risk – as long as that assessment is the same used for everyone… rather than a different one that discriminates and penalizes them more for being poor than others.. who are not.

    we should all want that.. and we all should want companies that specifically target the poor to be widely exposed for who they are and what they are doing… no different than we do for other bad products and services.

    Lauding companies who are already in trouble with regulators over deceptive practices that target the poor … is .. not a good thing… not at all “social justice”… and yes.. perhaps justifiable targets of “warriors”.

  3. Pay day are pay day loans. What can I say?

Leave a Reply