July 12, 2021
Optionality in Lending is How You Empower the Underserved
By: Travis Holoway
Growing up, my family and I lived in Cleveland, Ohio where my father worked for General Motors for over 35 years. While my father had a stable career, we lived in a community that wasn’t always so fortunate. Our neighbors, family and friends were underserved in all facets of life, including nutrition, education and financial services. This deficit created a desert of opportunity as resources that addressed the true needs of the community were always scarce.
My co-founder, a Baltimore native, also experienced that in most cases no options meant going without. He often shares a story of his mom needing a few hundred dollars to avoid the electricity being cut off, as her scheduled pay day was later in the week. He recalls that this would often mean that his family would experience the full consequence of going without. His childhood was filled with many such memories as his parents tried to ensure proper cash flow to run the household. Looking back, even where we both grew up, there was a genuine desire for advancement and to play by the rules, except the rules were not written for us.
The lack of options — which are either limited or no resources — in our communities are the root cause of many of the issues most Americans face. When there is a lack of options, most people have to go without or commit some desperate action or crime to overcome the scarcity. Individuals from the outside looking in say that payday loans are predatory and fight for their removal but what’s the alternative? What does a parent do when their kids are hungry because they had to use their grocery funds to pay for the light bill and there are no friends and family that can assist or loan options? Let’s just say as a child, my parents made sure I ate a meal by any means necessary.
The ultimate result of lack of options across a person’s hierarchy of needs creates many challenges in underserved communities. Limited work options further increase the gaps between a person’s need and resources. In addition to the lack of resources, underserved communities are often plagued by unhealthy food options which subsequently lead to an increase in the health disparity. . Communities that have to shop for basic necessities from corner stores will not have the best options and often have to pay a significantly higher cost. This all culminates in the lack of financial resources whether it’s for an emergency, well-being, or upstart. In each case, the only option is a payday lender, crime, or to go without. This is the true cost due to lack of options in most inner city and rural communities across America.
Optionality in life is naturally empowering, allowing an individual to learn and understand the cost difference between good, better and best. When creating a better option for short term loans, it’s important to enable a few key opportunities: first, borrowers should have the complete option over all costs, timing, and terms associated with the loan. It’s very different from a company assuming what a borrower is capable of doing and most importantly it immediately teaches a lesson in cost and time associated with leveraging someone else’s funds. Secondly, the majority of the returns associated with the costs of each loan should be redistributed back to the same community.
With the complete option and choice of costs associated with a loan, this model has proven that borrowers can effectively learn the cost of capital and ultimately lead to them receiving funds at a cost significantly less than any other alternative. When a borrower first uses an emergency personal loan solution, the initial amount should be limited until they establish trust while self-selecting what they would ultimately pay for the loan, including tip, donation and duration. We’ve proven that this type model over time effectively teaches the cost of capital and has resulted in the most affordable personal loan option. The average cost to a borrower over their first 12 months of usage in this model where self selection of tips and donations are used has resulted in a borrower cost of only 13.4%. According to a recent Forbes article, the average annual interest cost for a personal loan is 22.5%. When a borrower learns to reduce the cost of their request in reference to their ability to pay back the loan, this results in a better cost structure than any small-dollar loan product in America and a default rate that is three times better than traditional payday lenders.
Typically, financial institutions are always the biggest benefactors in providing such resources to this disenfranchised demographic. To fully create a community that serves one another, it’s important to establish a way to redistribute capital back to participants. For instance, with our model we intentionally elected not to label members “Borrowers” or “Lenders” as on our platform, because we know that financial situations change throughout the year. After bonus or tax season someone may be a lender, but during Back-to-School or Holiday season they may need to borrow. What’s compelling is that 30% of our members have both borrowed and lent on the platform which proves this model is valuable during times of financial highs and lows.
The optionality of offering a tip and donation selected by a borrower can never be compared to the fixed imposed fees that are associated with a traditional loan product. Not only are APR’s imposed by the lending institution, they are 100% a condition of receiving that credit. Instead, alternative loans should allow the borrower to have complete control over every facet of the transaction, including repayment date, potential tips and donations. As communities are built and reliant on trust, providing these options allows for a transparent community built and powered by the people it serves.
Although some financial products have limited my community’s ability to overcome daily challenges, I sincerely believe that having any option — even a less than ideal one — is better than no option at all. Imposed fees and pre-set durations are based on vastly larger aggregate assumptions, which are not tailored to specific borrowers or their cash flow. They are standardized across large products and consumer sets for simplicity. This doesn’t teach the cost of capital, instead, it forces individuals into pre-set cost structures based on a lending institution’s goals without any understanding or input from the borrower.
While there is still so much that can be done to assist these deprived communities, we are grateful that we have been able to leverage our personal experiences to create new products that build financial autonomy for our community. A community of people that most have deemed as financially illiterate and undeserved are now empowered and dispelling myths daily. Financial collaboration is the way!