Horrible Financial Ideas – When Fintech Goes Wrong

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.

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Did you know your home is like a safe, keeping your money locked away? That’s how it should be, and you shouldn’t be treating your home like a piggy bank.

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.

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Freelancers – please learn to budget your irregular income instead of paying for the privilege of accessing your own money

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.

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Nothing says “relaxing vacation” like paying between 20 and 36% interest

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.

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If you need a car title loan, your finances have been going rapidly downhill for a while. Just like this car.

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.

What’s the catch? I visited their FAQ’s and their legal page and noticed a few things:

  • 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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chiefmomofficer

IT professional, MBA, working mother of three, avid reader, geek and personal finance nerd

35 thoughts on “Horrible Financial Ideas – When Fintech Goes Wrong

  • May 8, 2017 at 10:49 am
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    This is scary. I wonder how many people fall victim to these scams? Thanks for sharing, CMO!

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  • May 8, 2017 at 10:59 am
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    I am with you on the outrage, CMO! I was raised in a small, poor, town in South Carolina and payday and title loan companies are everywhere. Such predatory lending, including the “better” options you mention in your post, should be outlawed. If it’s true, as Jimmy Carter said, that the measure of a society is found in how they treat their weakest and most helpless citizens, then we as a society have a lot of work to do. Want to take away any motivation anyone has to make a better life for themselves? Take away all their hope by allowing them to get sucked into a vicious payday loan (& equivalent) cycle that they can’t get out of. Good for you for calling the WSJ out on this article. Yuck!

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    • May 8, 2017 at 10:30 pm
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      Payday loans, car title loans, and the like seem to prey on the people that can least afford them. It’s too bad that they’re now trying to expand into “fintech” and brand themselves as a cool new alternative option

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  • May 8, 2017 at 2:05 pm
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    Wow… since I’m on such a low information diet these days, I had no clue about these businesses. They certainly are creative, though. I’m curious – did you dig into the background of any of the founders/investors of the companies? I find when I’m exploring some alternative investments that before I even start digging into the investments themselves, I perform due diligence on the people running the companies – oftentimes I don’t even need to look anywhere else besides their website – and that simple information will tell me all I need to know. More often than not, it’s run away!

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    • May 8, 2017 at 10:32 pm
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      I did look at the founders page for one of the companies, but it was really light on info. It basically said that they needed that kind of loan before and wanted to help others who needed that same kind of loans too. Good job checking out the owners of the companies you’re thinking of investing in!

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  • May 8, 2017 at 2:16 pm
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    People are always trying to make a buck, and payday lenders are a huge businesses. Not surprising that these companies would pop up. To me honeybee is the best name. Sounds so sweet but has a sting at the end!

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    • May 8, 2017 at 10:33 pm
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      Payday loans join the 21st century! Love the irony in the “honeybee” name too. 🐝

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  • May 8, 2017 at 3:13 pm
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    These are all predicated on the idea of squeezing out the very last cent of money you could possibly get your hands on. It speaks to the overall mindset in our society when that’s seen as an something you can build a business on.

    Hopefully none of these take off, and instead we are able to influence one consumer at the time to start thinking before spending. Great write-up, though 🙂

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    • May 8, 2017 at 10:35 pm
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      Hopefully this can help people realize that just because it’s a newer, app based product doesn’t mean that it’s good for your wallet.

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  • May 8, 2017 at 3:15 pm
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    This makes me angry too. Notice how much “unlocking” is going on out there! It reminds me of a great scene from “King of Queens” where Danny tries to help Doug finish a song he wrote to an old girlfriend. At the end Doug says “let’s close the box”.
    https://www.youtube.com/watch?v=XPzhPxfJYnQ

    Close the box. Lock it down. Put it back in the safe.

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    • May 8, 2017 at 10:36 pm
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      Soooo much unlocking going on! It makes it sound like your home, paycheck, and car are just temporary places to put your money. Then you make withdrawals from them just like a bank account! Ugh

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  • May 8, 2017 at 4:36 pm
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    These certainly are not good ideas, but I get why there is a place for such instruments given our debt loving culture. I do not fault the companies as there would be no market if we all treated our finances better.

    However I do know from seeing friends go through it that there are some extreme circumstances where these types of loans are the only avenue available. There is a whole portion of society who do not even have the finances in order enough to get a bank account. These people have no other choice in the short run. In the long run there are many other options and the key is getting them thinking ahead instead of the moment. Most studies show that your decisions also deteriorate when looking at things in the moment. I.E. In my mind this situation is a societal failure, not a company taking advantage, situation. We failed to educate society about long term finances.

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    • May 8, 2017 at 10:38 pm
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      I honestly think it’s both a failure in society AND a failure in these companies. If your entire business model is built on taking advantage of poor people in desperate situations, and making money off those that can least afford it, you need to take a hard look at what you’re doing.

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  • May 8, 2017 at 7:14 pm
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    Uggghhhh. We are not even a decade from the real estate crash that sank the global economy. Why are we working on new ways to decrease people’s equity and trap them into selling? How many different ways can we come up with to spend money before we have it?

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    • May 8, 2017 at 10:42 pm
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      People sure seem to love coming up with new inventive ways to spend money they don’t have!

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  • May 8, 2017 at 11:09 pm
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    Holy crap these startups are legally stealing money from unknowing consumers. I’m surprised that there are no regulations to stop this kind of thing.

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    • May 8, 2017 at 11:11 pm
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      Well I guess if payday loans, home equity loans, and car title loans are legal these kinds of companies would be too. Not that it makes them good ideas for the customer, of course

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      • May 8, 2017 at 11:12 pm
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        Payday loans are illegal in some states (I think). At least home equity loans have reasonable interest rates. Car Title loans are second only to the evil that is a payday loan. The worst part is these things take advantage of the poor which is unforgivable

      • May 8, 2017 at 11:14 pm
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        So true-taking advantage of the people who can least afford it isn’t a good business idea, in my opinion

  • May 8, 2017 at 11:23 pm
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    Ugh those are incredibly predatory. “Not as bad as payday loans” is about the best thing anyone can say about them. The recession ended less than ten years ago, and here we are with new and improved ways to send people further into debt. 😖

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    • May 8, 2017 at 11:26 pm
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      It’s pretty bad-when you’re “innovating” on a payday loan, you’re doing it wrong. Ugh.

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  • May 9, 2017 at 3:30 am
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    Oh puke.
    At least brick and mortar payday loan time places look as seedy as they are – they look the part. These fancy new apps with their slick graphics are somehow worse.

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    • May 9, 2017 at 8:16 am
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      They definitely seem to be set up and marketed like they’re a cool new product. But it’s just an electronic version of the same old payday loan store.

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  • May 9, 2017 at 1:07 pm
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    Could you imagine being a person that is running one of these businesses? what a sad life that would be. Thanks for calling them out CMO!

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  • May 9, 2017 at 5:37 pm
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    So maddening! And scary. To think people actually get involved in these things. So not good. Thanks for sharing so we can help spread the word how terrible these ideas are.

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    • May 10, 2017 at 10:19 am
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      Yes it’s sad, and scary. I just hope people reading the original article know that these are bad ideas, instead of reading about them and thinking “oh, great idea!”

      Reply
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  • May 23, 2017 at 2:10 am
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    Ugh – I think I’m going to be sick… 🙂

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  • May 24, 2017 at 6:38 pm
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    Fascinating stuff. The existence of these bad actors is a great argument for everyone to make establishing an emergency fund a priority.

    Best,
    -PoF

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    • May 24, 2017 at 6:40 pm
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      So true, POF! Even small amounts set aside for emergencies could help someone not need to use these kinds of “services”.

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  • June 1, 2017 at 12:05 am
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    As long as people have money, enterprising crooks will figure out a way to take it from them. These all seem like pretty bad startups. Thanks for alerting people to these bad actors!

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    • June 1, 2017 at 12:21 am
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      I know, it seems like everyone just wants to get a piece of your wallet! And what’s sad is the people who will use these kinds of things are the people who can least afford to.

      Reply

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