our current thoughts

A recent study by economic research group Moebs confirms what millions of underbanked consumers have always known:  Payday loans are less expensive than bounced checks and overdraft fees. Don’t believe it?  Let’s look at the math:

The average bank overdraft fee is $28 per transaction, with an average overdraft transaction size of less than $40.  A small payday loan of $100 (enough to cover two average overdraft transactions) costs less than $20. Consumers that use overdraft protection – whether intentionally or unintentionally — tend use it frequently.  In fact, 20 million checking account customers in the U.S. pay about $1500 or more in overdraft fees per year. It’s an eye-opening statistic. If these customers used payday loans instead of overdraft protection, they could reduce the fees they pay by more than 50%.

Payday loans are almost always a better option for consumers than overdraft protection.  But that’s not enough.  We think emergency cash lenders have a responsibility to make their product more convenient and less costly. That’s where we come in.  Think Finance is creating better options for the people whose needs are not being met by banks and payday lenders.  Here are a few examples.  And we’re just getting started.

Would you stay at a hotel that cost $36,000 per year?  Would you rent a DVD for $600 per year?  Sounds outrageous, right?  Actually, those prices are just annualized rates for a $100/night hotel and a $5 DVD rental.  You’d never stay in a hotel for a whole year and you wouldn’t keep a DVD rental for 365 days, so the annualized price doesn’t make sense.

Which brings us to the number one source of confusion and criticism about emergency cash loans — Annual Percentage Rate, also known as APR.  Millions of Americans use emergency cash loans to make ends meet when an unexpected expense occurs.  They typically borrow a few hundred dollars and pay it back over a few weeks.  Emergency cash lenders might charge a fee of 10% to 20%, which is almost always less costly than other options such as bank overdraft protection and paying bills late.  However, lenders are required to disclose the fee on an annualized basis, resulting in eye-popping APR’s of 300% or more (remember the $30,000 hotel room?).

Make no mistake about it, emergency cash loans are an expensive form of credit (that’s why they’re called *emergency* loans) but they meet a real need.  The high APR’s associated with these loans have become a source of confusion for customers and a lightning rod for critics, which distracts from the real issue:  Ensuring access to credit for those that need it most.

It’s important to note that we understand and respect the intent behind APR disclosures – our legislators and regulators want to protect consumers from making poor financial choices.  But APR may not be the right way to do it.

Arjan Schutte, an investment manager that focuses on the needs of underbanked consumers, proposes a new way to measure the quality of short term credit products in his blog.  It’s worth the read.

Recently, Think Finance had CEO Ken Rees share our story with reporters.  We were very excited to talk about our vision of developing innovative financial services products to meet the needs of a growing group of Americans being left behind by the traditional banking AND even more excited to see how much that story resonated the media we spoke with.  Check out a story published by one of our local publications, the Fort Worth Business Press , and learn more about the impressive things happening at Think Finance!