As states
"If somebody needs $1,500 on a Friday because the brakes on their car blew out, we can facilitate getting that customer $1,500 on the same day," said Todd Schwartz, founder and CEO of OppFi, in an interview. The loan would cost around $6 a day, an APR of 160%. "The APR may seem high but APR is calculated on an annual basis. It may seem expensive but OppFi has to cover certain costs." There are no prepayment penalties and the loans are fully amortizing, he said.
"The question is, if you took that [loan] out for a month and paid $180, is it worth $180 to stabilize your financial situation, fix your car so you can go to work and take your kids to school and not derail yourself?" he said. "The APR is always looked at as a number, but it's never looked at as, what value are you driving to your customer and are you actually solving a problem?"
Regulators and consumer advocates think a 36% interest rate cap will protect people from predatory lenders. A growing number of states, including Illinois, Arizona, Colorado, Montana, Ohio and South Dakota, have made this view the law.
The case against the 36% cap
Those who object to a 36% rate cap have data to back them up: An analysis of the impact of the 36% interest-rate cap Illinois set almost two years ago found that it decreased the number of loans to subprime borrowers by 44%.
Most borrowers said they were unable to borrow money when they needed it following the imposition of the interest-rate cap, according to the
"Only 11% of the respondents answered that their financial well-being increased following the interest-rate cap, and 79% answered that they wanted the option to return to their previous lender," the report stated. "Thus, the Illinois interest-rate cap of 36% significantly decreased the availability of small-dollar credit, particularly to subprime borrowers, and worsened the financial well-being of many consumers."
Borrowers who have lost access to their lender have paid bills late, cut back on everyday expenses, coped with debt collectors, and had utilities turned off, the report said.
Some fintech leaders argue that the fees on small-dollar loans should not be translated into annual percentage rates.
"We do not believe that APR is an accurate measure anymore," said Rodney Williams, co-founder of SoLo Funds, in a recent interview. Many fees that banks and other lenders charge, including rollover fees, instant pay fees, transaction fees, subscription fees and late fees, are not included in APR calculations but do make loans predatory, he said.
"APR is not what gets people in trouble," Williams said. "I know what happens when you pay an extra $15 every two weeks to roll a loan over. Total cost is a much more accurate perspective."
The case for a 36% cap
Consumer advocates believe the 36% interest-rate cap has merit and should be applied to all loans.
When Illinois passed its rate cap, Lisa Stifler, director of state policy at the Center for Responsible Lending, said the law will save the state's families more than $500 million per year, "dollars that can be put back into the local economy."
She and others have pointed out that people tend to get trapped by small-dollar lenders.
"The industry likes to ignore the fact that, historically, the majority of people do not only borrow once and just pay it back; there's a history of repeat borrowing multiple loans back to back to back to back to back," said Beverly Brown Ruggia, financial justice program director at New Jersey Citizen Action, which has pushed for a 36% rate cap in New Jersey. "The people who enter into these loans and pay them right back have no problem. Those people exist, but what the industry makes its money on is repeat borrowers, and they know this."
The 36% rate cap came out of the 2006 Military Lending Act, Brown Ruggia noted.
"The military did a lot of research and looked at what was a reasonable number for the industry to continue to exist, but not cause the kind of harms that we've been seeing in repeat borrowing and people who are trapped in these loans," she said.
As long as high-cost, low-dollar loans exist, people are going to use them, "as opposed to building a culture where there's a reasonable interest rate across the country," Brown Ruggia said. "We are still seeing this effort by the industry to sell this high-cost loan as the only solution to short-term problems. And what we see over and over again is repeat borrowers who sink themselves into endless debt. The industry's always talking about innovating. Let's innovate for something that gets people on their feet without usurious rates."
Schwartz at OppFi would like to see a federal small-dollar lending law and federal backing of these loans, similar to Federal Housing Authority-backed mortgages.
"I think if the government was willing to talk about a small dollar lending rule where there was some type of backstop for insurance, lowering the rates would be a possibility," Schwartz said.
