I’m always interested in learning the latest in FinTech – there are so many different apps and new ideas coming up every day, many of which are amazing or are focused on helping customers with their money. These FinTech companies are the opposite – instead of being committed to helping customers, they’re gouging (in my opinion) the poor.
I was scrolling through my Facebook feed the other day when I came across a “gem” (please read that sarcastically) of an article from the Wall Street Journal. Upon reading the details, I started to get angry. Like, really angry. I couldn’t believe that there are companies out there making money off people like this – and that they were being written about in the WSJ as if they might be good ideas. These “innovative startups” are, in my opinion, just the same old kinds of companies (payday lenders, car title loans, etc.) finding new ways to extract money from the poor and desperate.
So today, you get to share in my outrage by learning the details of these horrible ideas. Please note that everything in this article is just my personal opinion – based on the WSJ article, my own financial knowledge, and reading from the companies websites.
The article in question is called:
The Hidden Cash In Your Assets – New lenders give people a way to get money from their homes, cars—even unused vacation days
Here’s the link to the article so you can read it in its entire, terrible glory. It may be behind a paywall, although I was able to access it both through Facebook and through googling the title.
The article features three new financial “startups” that each have a different idea on how to extract money from your wallet by promising cash upfront in exchange for exorbitant interest rates – some of which are close to, or exceeding, the interest you’d pay on a credit card.
Point – Giving You Cash In Exchange For Your Equity
Most of this article is about the startup Point, which lets you “unlock your wealth” from the “safe” that is your home by giving you typically 10% of your homes value in cash. Then you don’t have to repay it like a home equity loan – so it’s like free money! Except for the catch, of course.
The catch is that you need to repay the loan within 10 years, or sell the property at some point in the next 10 years. Oh, and when you sell, they take a larger than 10% share of the appreciation of hour home. Apparently it works out to about a 7-11% interest rate on their original cash distribution – it’s capped somewhere in the “mid-teens”, according to the company. Let’s not forget there’s also a 3% fee involved – on top of the effective interest rate.
It’s kind of like a reverse mortgage, except there’s a time limit involved where you need to sell the property.
This is from the front page of their site:
Imagine having money in a safe that you are not allowed access – instead, you must borrow the equivalent amount of money from a bank and pay the bank interest for the privilege. That is what homeowners face every day with the wealth tied up in their homes. Accessing that wealth requires borrowing against the home, equity refinancing, home equity loans or home equity lines of credit (HELOCs). Point fixes that problem.
Why do I think this is a terrible idea? Oh, in so many ways. First of all, if you need a cash infusion that badly, you probably shouldn’t own the home you’re in. Second, if you were responsible and needed cash, you could get a home equity loan instead and save quite a bit of money. Third, all the fees involved. Fourth, the time limit. If you don’t repay the loan or sell the home, they can forclose on you. Fifth, the person most likely to “need” this kind of infusion is most likely to be hurt by it. I could go on, but I’m going to stop there for now.
The couple featured in this article, Toni and David Bell, apparently own a $1.7 million dollar home and received an infusion of $170k from Point. Why? Oh, to eliminate debts and do some home improvements. Improvements on a home they won’t own in 10 years, because they’re going to have to sell. That $170k infusion would cost $5,100 in fees (3%). How much will they have to have paid at the end of the loan? Believe it or not, I had to use a student loan deferral calculator to figure this out, because there’s no online calculators that cover this scenario.
A $170k balance with deferred payments for 120 months (10 years), growing at 9% (I took the middle number from the interest rates), would become $323,083. A regular mortgage loan of $170k taken out at 5% – the figure quoted in the article – would be about $216,374 over 10 years. So this costs you OVER A HUNDRED GRAND more.
Qwil – Payday Loans For Freelancers
If you’re a freelancer and you’re sick and tired of trying to do all that budgeting around an irregular income, Qwil has the answer for you. You can “unlock your income”, as promised on the home page, by using Qwil. They will accrue your unpaid earnings, which you can cash out at any time, and only take a “small transaction fee” for their trouble.
What does this sound like? If you said “payday loan“, you’re thinking like I’m thinking. This sounds exactly like a payday loan to me, albeit with a lower fee (0.5% – 5% of the loan).
Apparently, according to their FAQ’s, the fee varies depending upon the company you work for and the amount of time they think it will be before you get paid. The money can be transferred to your bank account or loaded to your Qwil debit card.
Why do I think this is a terrible idea? As I mentioned above, this is essentially a payday loan. Payday loans also come with relatively small fees dollar wise, but when you calculate the annual interest rate, it comes out to a huge amount. I believe you’re best off to learn how to budget on an irregular income, rather than paying a fee for the pleasure of having access to your own money. A few resources to help you – here’s an article from Forbes, one from The Simple Dollar, and another from Mint.
Honeybee – Borrowing Against Your Unused Vacation Days
This particular startup has found a way to help you turn your vacation days into cash. Honeybee Financial Wellness (ironic name) partners with employers to allow people to temporarily borrow against their PTO to “help with short term cash flow and unexpected expenses.” It’s touted as an alternative to payday loans, similar to Qwil above.
According to the WSJ article, this startup allows employees to borrow against their unused vacation days, typically an amount under $700, and pay them back with a fee that equals an annual percentage rate of 20-36%. After you pay back the loan, you get your vacation days back. The company only works with employers that pay out vacation upon termination, so the loan is essentially no risk to Honeybee (except I suppose if the employer goes bankrupt). On their home page they proudly talk about how they’re charging less than the 75-1200% charged by payday loans.
Why do I think this is a terrible idea? Really this is just another payday loan. And it’s targeted right at people who are least likely to get time off – the people with no access to credit, no ability to get a loan, and who need to borrow against their vacation days to get by. What happens if that person is sick, or needs time off, and all their vacation days are gone? Are they going to get fired from their employer – and then lose their vacation payout to this company?
I also personally find it disingenuous to talk about how this loan is at “no monthly interest” – the illustration on their home page even proudly shows “Financial Wellness – 0% Interest Rate” in the upper right. Instead of interest, they charge a “fee”. Now, if you pay $30 for the privilege of having early access to your own money, it doesn’t matter if it’s called interest, a fee, or a purple lollipop. Your wallet doesn’t care what you call it, it’s still money gone from your pocket. “Money is fungible” is a phrase often mentioned on the Bogleheads forum (one of my favorite sites).
Finova Financial – Car Title Loans For The Digital Age
Finova Financial promises to help you “unlock the cash in your car” according to the home page of their website. Apparently they do this by providing an alternative to a car title loan. What’s that? It’s where you give the title of your car to a lender in exchange for cash. You can learn more about them here.
They tout themselves as a great alternative to a traditional car title loan, because you can borrow at “only 30%” interest (plus fees, of course) and you can repay the loan over 12 months. Apparently a more typical car title loan has an interest rate of 300% and customers may have as little as 30 days to pay, according to the WSJ article.
- You have to own the car outright
- You need to carry both comprehensive and collision coverage on the car – for an older car, that could be a significant expense in addition to the loan. Digging into the legal page, your deductible also has to be under $500
- There are two “fees” charged in addition to the interest. A $75 filing fee (in Florida, some states are less) and a $25 credit investigation fee. Those fees, totaling $100, add another 5-7% effective interest on top of a typical loan of $1500-$2000
- That “only 30% interest” apparently only applies in some states, according to the legal page
- In Florida it’s 30% of the first $3,000, and less interest above that
- In Tennessee, it says the loan interest is 2% over 30 days, plus a fee not to exceed 1/5 of the principal balance. One fifth of a $2,000 balance is 20%
- In South Carolina, rates are “consistent with the rates filed and posted pursuant to Section 37-3-305 of the South Carolina Code of Laws”
- In New Mexico, the APR is 30%
- In Arizona, it’s on a schedule:
- Under $500, APR of 204% (!!!!!)
- More than $500, under $2500, APR of 180%
- More than $2,500, under $5,000, APR of 156%
- More than $5,000, APR of 120%
- In California it’s on a different, more reasonable schedule, with the maximum rate being 30%
Why do I think this is a terrible idea? With a car title loan, you’re giving up the equity in your car in exchange for money. This means that if you can’t repay the loan, the company will take your car as collateral. This is a great deal for the company – after all, they’ll get their money whether you repay, they take your car, or they get paid out by that insurance if you’re in an accident. But it’s not such a good deal for you. At 30% interest, you can get a credit card that costs about the same. If you’re looking into car title loans as an option, please look first into improving your overall personal finances.
In Conclusion – These Products Are Terrible – But Better Than a Payday Loan
Now, I understand the realities of having no money and suddenly needing a cash infusion. Back when I was in my early 20’s my husband and I didn’t make much at all (heck, we qualified for the retirement savings tax credit) and we had to take care of our son. Fortunately I knew about the power of setting small amounts aside, so we were able to get through any emergency that came our way.
If you definitely are going to get a car title loan or a payday loan, these companies may be a good option. After all, they’re charging less than payday lenders (which isn’t saying much). But needing to use one of these companies means you really need to be taking a hard look at your financial picture. If you can afford to repay the loans, you could afford to be setting that money aside for a future emergency. Being in a place where you need to pay someone 30% interest to borrow against your future earnings/vacation days/equity in your car means you’ve hit bottom. Please start focusing on improving your financial picture a little bit at a time, so you don’t need to turn to these options.
As my friend Big Law Investor put it when I shared this article with him, “Sounds like absolutely terrible ideas for the consumer. On the other hand, looks like a great deal for the FinTech companies.” They are taking little or no risk, because they’ll get paid no matter what happens to you. But in the meantime, you’re digging yourself deeper into debt and compounding your financial problems by relying on these kinds of options.
What do you think about these options? Have you run across any other terrible FinTech ideas, that are great for the company but horrible for the customer? Let me know in the comments.
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