Consumer Advocates Question FinTech Company’s High Default Rates, Triple Digit Interest Rates
Consumer advocates criticized the high interest rates and high default rates of Elevate Credit, Inc. (Elevate), an online lender that is expected to soon have an initial public offering. In its recent filing with the SEC, Elevate cited several risks to potential investors, including “regulatory limitations on the products we can offer and markets we can serve.” The Consumer Financial Protection Bureau (CFPB) is currently developing a rule on small dollar loans.
"Elevate charges its customers an average APR of 146%, and the rate reaches as high as 299% APR. A huge number of its borrowers eventually default on their loans, but with interest rates so sky high, defaults may not matter to Elevate as long as it squeezes out enough money to turn a profit,” said National Consumer Law Center Associate Director Lauren Saunders. “We urge the CFPB to finalize a strong rule on small-dollar loans. The agency should insist that companies like Elevate stop peddling loans they know are unaffordable, so that a financial lifeline doesn’t become an anvil.”
Elevate's loans are much longer than typical short-term payday loans, with a repayment period that generally runs from 10 months to about two years, depending on the type of loan. With high rates and long terms, the company may profit even on loans that default. For example, according to NCLC's report, Misaligned Incentives, Elevate recovers 150% of the loan amount after the consumer makes only the first 14 of the 26 payments due on the $2,250 “Rise” loan it makes in Alabama with a 274% interest rate. California data indicate that in 2014 at least 29% of Elevate’s loans, and perhaps many more, were in default, according to NCLC's report. (PDF)
Diane Standaert, Director of State Policy at Center for Responsible Lending, added, “Elevate has created a quick and easy method to ensnarl borrowers in a long, costly, and painful debt trap. Their payday installment loans are at least as dangerous as short-term payday loans.”
Elevate's net charge-offs of debt that is unlikely to be collected were 54% of domestic revenues in 2016, the same amount as it reported in 2015. Elevate's filing also indicates that it does not expect lower charge-off rates going forward, stating: "[W]e do not intend to drive down this [charge-off] ratio significantly below our historical ratios and would instead seek to offer our existing products to a broader new customer base to drive additional revenues."
The U.S. Department of Defense recently recognized the importance of reasonably priced installment loans, applying Congress's interest rate cap of 36%, including all fees, to longer-term loans when made to members of the military. Many states also have interest rate limits of around 36%.
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