But many people, even in rich countries like the US, don't have a buffer to deal with situations like these. To many of them, paying $100 interest so that they can get their car fixed today, and continue to go to work and earn a living, is a rational and reasonable decision when compared with the alternative (can't drive to work -> no income -> can't pay bills -> ...).
I think it feels that way to those who think they know what helps and what doesn't. To me, it feels like a vast majority agree helping is good, but are cynical about the method and helpers. I think we can all agree that repeated failures and not learning from them is intolerable.
I've thought for some time that this is one area where (as you say) there's a clear social need, and that the solution is for a non-profit lending organisation to offer the loans. As in, the lending company would, overall, aim to break even once the cost of operation, loan defaults, and profit from loans are taken into account.
It probably goes without saying that the loans would have a higher interest rate than those seen with longer-term standard loans, but I'd imagine they'd be orders of magnitude lower than some of the awful, predatory rates --many over 1000% APR-- that we typically see with UK 'payday' loans.
As I said above, the major issues are (i) effective underwriting, and (ii) efficient operations.
The better you can distinguish good customers from bad (better data and better models), the less money you lose to people that don't pay back. The better your tools to serve customers, the more customers you can serve without needing to increase the size of your team.
By reducing costs, you can charge less, get more customers etc.
A non-profit would face exactly those same two challenges, just to break even. Not needing to make a profit would have a much much smaller impact on its ability to reduce prices, than the two factors I mention.
I remember in the '90s all the fuss about "microcredit" in developing countries. Maybe it's time to have something like that in "developed" countries too?
"Microcredit has been a disaster for the poorest in South Africa" https://www.theguardian.com/global-development-professionals...
"India's micro-finance suicide epidemic" https://www.bbc.com/news/world-south-asia-11997571
"Micro-credit schemes of trouble: Housewives turn ‘beggars and prostitutes’ to cope" https://punchng.com/micro-credit-schemes-of-trouble-housewiv...
The original microcredit vision was low rates, in strong collective settings, as an investment to support productive endeavours: giving people enough money to start a business, or supporting them in emergencies so that their situation wouldn't dramatically change (fix a broken car so you can keep working etc etc). It shouldn't be a way to support consumption. It's hard not to inject moralism in the process, but there must be criteria.
Anyway, even if we're specifically talking about micro-enterprise, there is a high rate of failure and then people having the loan as millstones around their necks, and there's questions about how good it really is to have a bunch of businesses of the sort that are financed by microcredit: https://governancexborders.com/2013/05/29/the-art-of-pointle...
In the US we have Credit Unions, which are exactly this.
And, even if they were short cash for some reason,they have both access to zero-cost (or negative cost, given rewards) short-term loans [0] and sufficient income after essential expenses to pay it off without resorting to loans with interest.
[0] e.g., currently zero-balance credit cards as long as paid off within the next billing cycle.
Why do they refuse to lend if it is profitable?
> Why do they refuse to lend if it is profitable?
Good question.
Note I didn't say it is profitable for the banks to lend to those segments. I said those segments can be lent to profitably.
In order to profitably lend to customers who banks turn away (mostly those with a 'bad' credit history based on credit bureau data, or those with little/no data at the credit bureau), you need:
1) Effective credit underwriting (i.e. accurate models/processes to decide whether to accept a particular application, and how much to lend to that applicant at this time), and
2) Efficient processes of acquiring, onboarding and servicing customers.
When a bank lends 10k at 8% for 3 years to a low risk customer, they'll make over 1k in interest over the life of the loan. So they can afford to have inefficient operations/systems.
When you lend 500 to a customer who is likely to pay back, e.g. 600 over the next 6 months, there's only 100 in risk-adjusted margin there, to cover all your costs of underwriting the loan, following up on missed payments etc.
They aren't profitable enough for an organization of that size.
Markets get segmented into tiers. With banks that might create a situation where the easiest lending targets get processed by the highest volume, lowest cost institutions, and the small valuable cases become boutique.
The problem with that is, unlike other boutique areas, the wealthier person can spend a little more for a limited run high quality good. But here the boutique has to sell to the poorest groups, so it's hard to compensate the provider through pricing for the lower efficiencies of being smaller. It might shut down services that the industry would provide if less consolidated.
I'm not defending this, just presenting one possible way this could be playing out even with everyone acting more or less rationally.
Non-bank smaller lenders often have many fewer regulations, allowing them to make more targeted automated algorithms, which means they can serve people banks can't.
As an example, imagine that you lend someone $100, and there is a 50% chance they will pay you back, and in that case they will pay you $210. And all this costs you is a mouse click. Some individual would click "yes". In their free time.
Now in the bank, there is an employee doing this as a part of their paid job. They have a manager, that manager also has a manager, plus you need to pay the janitor, etc. You also need to pay diversity training for all of them. And all financial transactions they do must follow all kinds of regulations, which regularly change. Simply, the overhead is not worth it.
But I do see mobile payment and mobile borrowing could be mounted together.
I have to think there is some misunderstanding here - lots of nonbank companies issue loans. Ford Motor Credit is not a bank.
The thing that banks are uniquely allowed to do is to take deposits, and lend out that money.
Q: Do I have a credit limit with Affirm?
A: Unlike a credit card, Affirm is not a revolving line of credit. While customers can take out multiple Affirm loans at once, each Affirm loan application is evaluated separately as a closed-end transaction. An application from a returning customer may be denied, however, if that customer has failed to repay other Affirm loans on time or if the customer shows excessive borrowing behavior.
The credit building is a little much... not sure what >30% interest builds.
- Many immigrant populations thrive because more established members of the community invest in and loan to their peers (especially family members). They may not have twenty years of credit history and market research, but they have close-knit ties that go back generations and a person's reputation as leverage.
- A Planet Money episode after Hurricane Sandy mentioned studies that proved a small business was more likely to survive a natural disaster if it worked closely with other businesses. The conclusion was that businesses would provide informal loans to one another to keep everyone afloat until the insurance claims could be processed (which could take months)
"Cant get a loan due to less-than-perfect credit? Then pay 4,000% interest!"
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The finance charge ranges from $15 to $30 to borrow $100. For two-week loans, these finance charges result in interest rates from 390 to 780% APR. Shorter term loans have even higher APRs. Rates are higher in states that do not cap the maximum cost.
For context, US banks typically charge this $15 to $30 in overdraft fees, for payments of less than $50. For example, see the table and note immediately below it here:
>In China, part of the reason is caps on loan interest rates.
How exactly is that the reason? I thought about it, and guessed that you may mean that it is because lenders cannot charge high interest rates to those segments, but if they are a risk anyway (guessing because poor or have unpredictable income), why would banks want to lend to them? I mean, even if banks were allowed to charge higher interest, the borrowers could default on the principal or the interest, right? [Not a financial expert here.]
Bank do refuse to lend to large segments of the population which can be lent to profitably.
In China, part of the reason is caps on loan interest rates.
But banks in developed countries, like the US and the UK, also fail to serve a large segment of the population. Those underserved by banks have limited options to get loans for emergencies etc., and difficulty building their credit history to gain access to cheaper credit in future.
If you're based in London and are a software engineer or data scientist interested in solving this problem, please email me (personal address in profile) and I can tell you about what we've built so far and what's ahead.