As the Consumer Financial Protection Bureau gets ready to crack down on payday loan providers, a growing number of online lenders are promising borrowers with bad credit a fairer, less expensive emergency alternative.
Many of these lenders insist they’re not payday lenders even though they, too, charge three-figure APRs in exchange for supplying a quick loan. Some have also loaded their websites and social media accounts with consumer-friendly personal finance advice, rate-lowering incentives and transparent fee schedules, positioning themselves as subprime lenders with a conscience.
The subprime lender LendUp, for example, markets its emergency loan product as a safer alternative to a costly payday loan. APRs can run as high as 200 percent for a 30-day $200 loan or more than 700 percent for a one-week loan – cheaper, in some cases, than a typical storefront payday loan, but still extremely costly. However, unlike storefront lenders, LendUp doesn’t allow you to roll over your loan, so your loan amount won’t grow over time with costly fees. Payday loans, by contrast, have come under fire for trapping people into debt by allowing them to roll over their expensive loans multiple times for a hefty fee, causing their total loan amounts to balloon.
Similarly, the online lender Rise charges interest rates as high as 365 percent, depending on your state. But like LendUp, it allows repeat customers to lower their interest rates on new loans when they pay back their older loans on time. Rise also provides customers with a free credit score so they can monitor their credit as they rebuild it.
Meanwhile, Zestcash charges rates as high as 450 percent, but it says it’s “a better way to borrow extra cash” than a payday loan because the lender only offers installment loans you can’t roll over.
Consumer advocates have sharply criticized these online lenders for maintaining three-figure APRs, despite marketing themselves as more responsible alternatives.
In a January 2016 interview with InsideSources, the National Consumer Law Center’s Lauren Saunders chided online lenders for offering longer-term installment loans with high rates. “All installment loans have lower rates than payday loans, but a longer-term loan that binds you to a triple-digit rate is still dangerous,” said Saunders.
A 2014 National Consumer Law Center report also took issue with the online lenders for positioning themselves as safer loan alternatives. “Some of the features of these loans are arguably ‘less bad’ than those offered by traditional payday lenders, but these products still fail to meet the requirements to be considered genuine, better alternatives. They still feature three-digit APRs,” wrote Persis Yu, Jillian McLaughlin and Marina Levy in the report.
Meanwhile, consumer advocates have called for a rate cap of 36 percent on consumer loans, which is already in place in a number of states. “A 36 percent interest rate cap on payday loans most effectively stops the cycle of debt,” said the Center for Responsible Lending in a position statement.
Subprime lenders have argued that such a rate cap would hobble their businesses and make it impossible to lend to borrowers with a history of defaulting on their loans. But some consumer advocates say the bigger worry is that there are so few affordably priced options available to replace the pricier lenders once they close.
In a lengthy analysis in the May 2016 issue of The Atlantic, Bethany McClean noted that lending to subprime borrowers is so risky and expensive, it has led to relatively slim profit margins and has scared away other lenders who are in a better position to provide less costly loans. Some nonprofits and credit unions offer affordable small dollar loans to consumers in need, but they’re generally not widely available.
“The argument that payday lending shouldn’t exist would be easy if there were more widespread, affordable sources of small dollar loans,” wrote McLean. “But thus far, there are not.”