LendUp: A Better Payday Loan?
By Consumers Union on Wednesday, May 14th, 2014
Can tech start-up LendUp provide a real alternative to shady store-front payday lenders?
At the Finovate Spring 2014 conference in San Jose earlier this month, over 60 tech companies presented their new financial services products, many designed to make financial products more intelligent and encourage quicker and more efficient transactions. One of the most popular presentations was from LendUp, which, along with several other companies, won the coveted “Best In Show” prize.
LendUp presents itself as an alternative to shady payday loan storefronts and online payday lenders that offer high-cost small-dollar loans. Traditional payday lenders give borrowers an advance on their paycheck or government benefit, which the consumer has to repay in full, plus a fee, within 14 or 30 days. A standard fee is $15 for a $100 loan, which may not sound like a lot. However, according to the CFPB, four out of every five payday loan borrowers either renew their loan or pay it off with money from a second loan. About half of the time, consumers end up renewing one loan ten times, keeping them trapped in a cycle of debt. This causes many borrowers to pay more in fees than the original balance of the loan. If you were to renew your $100 14-day loan over the course of a year, that $15 per-renewal fee would turn into an effective APR of 391%!
According to the sample fee schedule posted online, LendUp’s rates can be slightly lower than the one cited in the previous paragraph – one example is $12.50 for a two-week, $100 loan. That would add up to an effective APR of 325.89%. LendUp is unique in that it requires a brief cooling-off period between loans – 3-4 business days — so consumers can’t immediately roll over the same loan. Still, it’s possible to take out several loans in one year, which could be expensive. LendUp promises to give consumers a 30-day extension if they can’t pay back the loan, and encourages consumers to work with them if the new deadline can’t be met. If the consumer doesn’t pay back the loan, LendUp may send the bill to collections, which will damage the consumer’s credit.
Another of LendUp’s unique features is that they promise to drop interest rates — as low as 29% APR — for borrowers who make on-time loan payments and/or pursue their financial education classes. In other words, once consumers demonstrate that they are less-risky borrowers, their interest rates decline accordingly. LendUp also offers to report loan payment information to credit bureaus so that consumers can build their credit ratings.
It’s promising that LendUp bans rollovers, and we’re all for innovation in the small-dollar loan marketplace. But LendUp’s starting rates are still troubling. Consumers Union has long advocated capping interest rates at 36% APR. Many consumers rely on small-dollar loans for emergencies or simply to make ends meet, and consumers deserve protection from exorbitant interest rates. To learn more about payday loans, read our blog post here. And please click here to share your experience with payday loans.
Have you or anyone you know ever taken out a payday loan? Does LendUp sound like a better option to you? Tell us about it in the comments!