New Lenders Spring Up to Cater to Subprime Sector

March 6, 2014
Wall Street Journal 
credit card news
New lenders are reaching out to consumers with subprime credit, a population often ignored since the financial meltdown. Equifax Inc. reported that issuance of consumer loans and credit cards to people with credit scores below 660 hit a low of $28 billion in 2010 but climbed to $36 billion last year through October. Many lenders are offering credit at interest rates approaching or surpassing 10 percent -- which is higher than prime loans but lower than many credit cards and payday loans.

One of the firms originating loans for people with subprime credit is Lending Club, a peer-to-peer platform that allows investors to pool money to make consumer loans. Another is FreedomPlus, a California lender and offshoot of Freedom Financial Network that opened its doors in mid-February. FreedomPlus offers loans up to $35,000, to be repaid over two to five years, to people with credit scores between 600 and 700. Rates range from 7.49 percent to 36 percent but average 18 percent to 20 percent. Two former officials at the Consumer Financial Protection Bureau, meanwhile, are working under the banner of Fenway Summer LLC, a Washington, D.C.-based venture, to offer a credit card for people with scores roughly between 590 and 630.

Regulators are trying to curb how lenders market to struggling borrowers. The Credit Card Accountability Responsibility and Disclosure Act restricted late fees and interest-rate hikes, for instance. This has encouraged expansion by lenders into the subprime market, also called the "emerging prime" or "near prime" market to avoid the stigma attached to the subprime label.

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