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The Almighty Buck Businesses

The New Payday Lender Looks a Lot Like the Old Payday Lender (theatlantic.com) 78

Posted by msmash from the closer-look dept.
Apps promising to "advance" a user's wages say they aren't payday lenders. So what are they? From a report: Earnin does not call its service a loan. Rather, it's an "advance": Users are borrowing from their own paychecks -- not from the app. It does not require a credit check, and promises no hidden fees or additional financing charges, even if users don't tip or repay. Its terms of service say it will never attempt to collect on an advance that wasn't repaid. Earnin is one of a new class of online lending apps, marketed as frictionless alternatives to traditional payday lenders. They are advertised on dating apps, YouTube, and in between episodes of a Hulu binge. Crucially, rather than charging interest or a financing fee, these apps collect their money via those "tips," as do the companies Dave and Moneylion. Unlike with, say, a food-delivery app, tips don't go toward augmenting a low-wage worker's hourly rate, but simply toward the companies themselves: Dave says tips are "what keep our lights on," and Moneylion says its tips "help us cover the high costs of keeping Instacash interest free."

Earlier this year, after a probe by New York State regulators, Earnin ended its practice of increasing users' borrowing limit based on how much they tipped. It still tells users "if the Earnin community keeps [tipping], we'll be able to expand our services." There's an analog for the services these apps offer: payday lending, which more than a dozen states have effectively prohibited. Payday lenders peddle small-dollar loans, available right away, then debit the amount borrowed, plus a financing fee, on the borrower's next payday. The financing fees and interest rates associated with payday loans are enormously high, as much as $30 per every $100 borrowed, according to the Consumer Finance Protection Bureau.
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The New Payday Lender Looks a Lot Like the Old Payday Lender More

The New Payday Lender Looks a Lot Like the Old Payday Lender

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  • Earnin requires constant access to users’ bank-account well let's see how long before the laws put an stop to this.

    • Re: (Score:1)

      by Anonymous Coward

      Earnin requires constant access to usersâ(TM) bank-account well let's see how long before the laws put an stop to this.

      So how do they actually work with that?
      Is it set up to watch for their paycheck direct deposit, and automatically start a transfer of it to the loan company account?

      Securing an advance is one of the biggest problems for why the loan/advance industry is as shitty as it is.

      From the loan company side, if you can't 100% guarantee repayment, honest business won't want anything to do with it, leaving the bottom of the barrel scum as the only ones willing to offer such service.

      From the customer side, there will al

  • I'm too lazy to calculate that rate but it must be enormous if payday is a barely week away.

    • Yep, the interest rates were always enormous....as were the risks since there was no credit check.

      Payday lenders did serve a purpose as a "lender of last resort" for when shit hit the fan. Unfortunately, shit can hit the fan more than once, resulting in the borrower rolling over those loans over and over again, producing headline-grabbing numbers.

    • Re:Annualized $30 per $100...whoa (Score:4, Informative)

      by AvitarX ( 172628 ) <(me) (at) (brandywinehundred.org)> on Thursday December 19, 2019 @03:50PM (#59538936) Journal

      The typical fee in my area is $75 every 2 weeks for $500.

      Basically they give you $500, and withdraw $75 every 2 weeks from your account without covering any principal until you specifically make the $500 payoff.

      It comes to 400% non compounding interest annually.

      • Why do you give them the courtesy of not quoting the representative annual percentage rate (APR)? An actual example from a payday lender in the UK: "Total Amount of Credit: £300. Duration of the Agreement: 90 days. Total Amount Repayable: £454.26 to be re-paid in 3 equal instalments of £151.42 on your next 3 pay days. Interest is Fixed at a rate of 292% per year – 0.8% interest per day. Representative 1265% APR."

        • Re: (Score:2)

          by AvitarX ( 172628 )

          My math:

          (($75 fee/interest / 500)/14 Days)*365 Days * 100 = 391 APR

          How are you calculating it?

          I've really been scratching my head with this one, in your example:

          152 in fees/ 300 loan / 90 days *365 * 100 gets me 205 APR

      • The typical fee in my area is $75 every 2 weeks for $500.

        Basically they give you $500, and withdraw $75 every 2 weeks from your account without covering any principal until you specifically make the $500 payoff.

        It comes to 400% non compounding interest annually.

        We called that a "vig" and it was 10% due weekly. Don't forget to make your payment or Guido will have to come collect...

        So your $500 loan would cost you $50 every week. Plus the original $500.

    • Yeah the old-fashioned payday lenders charge RIDICULOUS rates. Absolutely crazy. Which is the big problem with them.

      If these apps indeed don't charge interest or large fees, that's a totally different situation. I'm suspicious, but it sounds very different.

      • It IS different. I've no idea what they're talking about with this article. They're leveraging the scale at which they operate to make it possible to advance pay for a trivial fee and stay in business.
  • but I don't care. There are situations where people need cash fast. Some people have enough assets to take out a secured loan against assets. Some people have to resort to carrying a balance on a credit card. Some people need a payday lender, and some people have to pawn or sell possessions. Don't judge.

    • Re: (Score:2, Informative)

      by Anonymous Coward

      There are situations where people need cash fast.

      Then ask your butler to sell some of the silverware.

      Some people need a payday lender, and some people have to pawn or sell possessions.

      Pawn is a loan, backed by an object of value as collateral. The normal terms for a pawn is that you'll return with cash plus fee to get your item back. It's a very simple kind of loan with a fixed charge rather than compound interest. The main way the pawn shop gets you is the value they offer for a good is way below what it might sell for. If you're looking to sell stuff, pawning is usually a bad way to go.

    • I'll judge the payday lender for their practices. Especially because of the person who needs it. Someone trying to weasel out of being regulated like one is probably trying to be worse than something that's already bad.

    • Re: (Score:2)

      by AK Marc ( 707885 )
      The problem isn't the people in need. The problem is the people preying on desperate people.

  • payday lenders (Score:5, Informative)

    by renegade600 ( 204461 ) on Thursday December 19, 2019 @03:48PM (#59538922)

    payday lenders my foot! call them what they really are - loan sharks.

    • Loan sharks charge, on average, 25-30% interest and just kick your ass if you fail to repay. I've seen payday lenders charging 1600% and their collection methods are infamous for crossing the line of legality.

      So, don't be so cruel as to compare your local shylock to scum like payday lenders.

  • Don't bet on the races.

  • Ummm, what?

    OK. I would like to advance 50 years of paychecks please. BYEEEEEEEEEEEEEEEEEEEEEEEEEEEEE!

  • Price to pay for access to credit (Score:5, Insightful)

    by h4ck7h3p14n37 ( 926070 ) on Thursday December 19, 2019 @04:27PM (#59539122) Homepage

    The financing fees and interest rates associated with payday loans are enormously high, as much as $30 per every $100 borrowed, according to the Consumer Finance Protection Bureau.

    We need to decide if we want everyone to have access to credit or if we want low rates.

    It's crazy to think that people with no collateral and a poor credit history should get a good rate on their loan. That loan rate is high because the default rate is high. It's just not profitable to offer the low rate that people with good credit get to people with bad credit.

    • Re:Price to pay for access to credit (Score:4, Insightful)

      by King_TJ ( 85913 ) on Thursday December 19, 2019 @04:42PM (#59539198) Journal

      The decision is simple, really. No, not everyone should have access to credit. Even on a personal level, think of that deadbeat relative who always begs family members for money and makes promises to pay them back that never materialize. Would you keep loaning them money, or get angry that others in the family stopped doing so?

      Receiving credit should be a privilege that you're extended because you're NOT a poor risk of repaying the debt.

      These loan sharks with stupidly high rates aren't really doing their customers any favors. I'm not big on government regulating them because as long as they're not lying about the terms and conditions for the loans they offer people, it seems to me like it should be legal. But the harsh reality is, if you're in such a bad financial situation so you need that relatively small sum of money immediately, despite the terrible interest rate or fee? You're already unable to keep up with the bills you owe. This will just postpone the inevitable for you and make a deeper debt hole to try to get back out from under in the end.

      • The obvious counter argument is that black markets exist to serve needs otherwise unmet by the regulated market. If we get rid of payday lenders, we'll end up with actual loan sharks who come directly to the home to collect with a baseball bat. The poor will still have debt, but they'll suffer in other ways, too.

        With payday loans, they at least have bankruptcy protection.

    • In practice, most of these people need a payday loan to make up for paying off their last payday loan in a never-ending cycle. They only wish it was 30% for falling short one time. This helps very few people and financially ruins many. Whose needs are we really thinking about here? At the very least, cyclical borrowing could be should be put to a stop because everyone knows it will never end well.

    • WeWork just got like a 3B line of credit from goldman that is not secured with collateral. They got a much better rate than these guys are giving. Maybe the desperate poor can pool together across the country and make one giant 3B dollar loan and divvy up the amount. They will probably pay back as a pool more than WeWork will.

      • WeWork got $1.75B line of credit from Goldman - cosigned by Softbank (a $90B holding company) - so it is actually secured with collateral - it is just that it is not WeWork's collateral.

    • Re: (Score:2)

      by jythie ( 914043 )
      Given how mind numbingly profitable these lenders are, the risk of default does not seem to be the driving factor behind the high rates. A captive audience without access to better alternatives on the other hand does a good job of explaining it.
      • Comment removed based on user account deletion
        • At the other end, if the rates are really too high, someone would come in and offer a better deal and grab that business away. The fact that they are not is either collusion (unlikely) or 'external entities'. I.e., The govt or the mob.

          • Re: (Score:2)

            by hawk ( 1151 )

            I can't be in the only place in the countries where credit unions are doing *exactly* that . . . they advertise for it--and with the loan, at a fraction of the price as for the parasites, comes a dose of borrower education to help the borrower break this vicious cycle . . .

            hawk

    • "We need to decide if we want everyone to have access to credit or if we want low rates."

      Fine, then: no, not everyone should have access to credit.

      Individual responsibility is a fine thing, *if* you are responsible. Here, the underlying problem is that some people are terrible at managing their money. They are not capable of being responsible. Allowing payday lending is allowing unscrupulous scum to take advantage of these people.

      FWIW: The people who cannot manage their money are likely to be the ones on pu

  • TIP?!

    What the heck? Should I be tipping the clerk at the bank now? How about my pharmacist?

  • There is this one Earnin commercial that makes me want to punch through my TV screen to hit the people that live inside it.

    It says something like how some new shoes are coming out this week, but you won't have the cash to buy them, so use Earnin! WTF? If you don't have the money to buy something, then DON'T BUY IT!

    https://vimeo.com/41152287 [vimeo.com]

  • When I travel to the US I am always amazed at the amount of tip payed to bartenders. It's around 15%. Comparatively, personal loans use to be in the 6-20% range -- and that's YEARLY.

    With this mentality, tips are a much better source of income - even if some people do not tip.

    • You can get a personal loan for 3-5%. The catch is that you have to have a credit history that convinces the bank that you'll pay them back.

  • Employers should allow advances (Score:4, Interesting)

    by Solandri ( 704621 ) on Thursday December 19, 2019 @05:37PM (#59539440)
    When I first started working, I naively thought I'd be paid in the middle of the month. The way I figured it:
    • If I was paid on the first day of the month, I'd be receiving my month's pay up-front, then working 30 days to earn the money. The risk was entirely upon the company that I might bail with the money without doing my work.
    • If I was paid on the last day of the month, I'd be working 30 days for free, then receiving my money at the end of the month. The risk was entirely upon the employee that the company might file for bankruptcy, and benefit from their work without paying them.
    • If I were paid in the middle of the month, I'd be working 15 days for free, get paid for 30 days, then work the remaining 15 pre-paid days. That split the risk 50/50 between employee and company.

    The last one seemed to be the fairest distribution of work and financial risk. So I figured companies would pay you in the middle of the month. Silly me.

    Later when I was running my own company with employees, I learned some of them were going to these payday loan places (legalized robbery IMHO). So I instituted a policy where a limited number of times a year, you could request to get your paycheck early. You could receive up to the number of days/hours you'd worked at the time of the request. So if you were paid every 2 weeks and had worked 1 week (40 hours), you could request to get an advance on your paycheck one week early for up to 40 hours of work. No risk to the company since you'd already done the work and were going to be paid the money eventually anyway. It was just a little more work for the accounting department.

    • Good for you, wish more companies did this. I started with IBM and they paid weekly, you got a check on monday for the prior week. And this was the result (or so I was told) that IBM did not want to pay on fridays as Watson was afraid people would blow the money over the weekend. No idea if they still do this. IBM is a radically different whoring company since I left in 82.

    • Re: (Score:1)

      by Golnix ( 6224150 )
      I work for a non-profit Org. We can cash in up to 100 vacation hours per year plus you can tax exempt those hours. It can help a lot if you are in a pinch.

    • Re: (Score:1)

      by bn-7bc ( 909819 )
      well the risk is only for short term imployment an at te start /teil of the period fir the rest of the long term position there is no difference you get payed evry 30 days, ye it sucks for you/emplyer first month/ when you bail, hold on no it does not if you are paide on the first of the month for the preceding mounts work, they ar not out a penny

  • Its terms of service say it will never attempt to collect on an advance that wasn't repaid

    So... if I am to read this literally, I can get an advance, *NOT* repay it, and they will not ever try to collect it?

    That can't possibly be what they mean.... although the sadist in me thinks it would be funny as hell if it's actually in their real T.O.S. that way and someone takes them to task on it.

  • Either poor people can't borrow money, or else you can't ban high interest rate short term loans. You can't have both; math and business do not work that way.
    • Earnin and the like aren't loans. They're a means to allow someone to advance themselves money with no interest, which becomes feasible at the scale involved.

      And the idea that you need to charge >1000% (I've seen up to 1600%!) interest for poor people to be able to borrow is absurd. You might as well legalize loan sharks at that point, they charge a much lower rate and, in the end, cause far less damage.

  • So how exactly does the headline fit the facts? (Score:3)

    by sabbede ( 2678435 ) on Friday December 20, 2019 @10:23AM (#59541294)
    Does Earnin charge 1000% interest? A 30% fee? No? So, what about it resembles a payday lender? Where's the usury that makes a knee-breaking loan-shark the cheaper alternative?

    The simple answer is that the headline is a lie. There is no resemblance beyond the core concept of getting money before getting paid, which doesn't even happen the same way! One is a usurious loan, the other a simple advance on pay.

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