Why Payday Lending is Such an Awful Deal

We’ve all seen them. Some of us have probably even been tempted to get one. They are generally known as payday loans, although they have many different names – including cash advances, pay advances or unsecured loans.

No matter the name, all payday loans generally mean one thing: horrible rates for borrowers.

COLORFUL ADVERTISING 

Walk past any payday loan shop and you’ll probably see a number of signs in the windows.

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The purpose of these flashy signs is to attract customers who are spontaneous, desperate, and who are looking for a loan ASAP.

Instead of doing that, we’ll tell you exactly what these services really are:

Checks Cashed: This service will take a paycheck and turn it into cash money for a customer.

Cost: In some states, payday lenders can charge at least 3% for this. For someone cashing a $1,500 check every two weeks this would cost $45, or $1,700 annually

Money Orders/Bill Pay: This is an alternative to using checks or electronic payments to pay bills, since cash is not accepted through the mail or online.

Cost: Mybanktracker did some research on Western Union, finding that on average it charges $.70 per money order, which would be $8.40 just to pay a monthly bill yearly through the mail.

Title Loans: Also known as a secured loan, this is where a lender will keep something of value as collateral from a borrower. Usually, a car title is used.

Cost: According to Car Title Loan, the average percentage rate of these loans can vary between 36-360% in annual percentage rates, or APR.

Payday Loans: These are short-term loans designed to help a borrower short on money until their next paycheck.

Cost: Usually a flat rate, for example $10 to borrow $100 for two weeks. Lenders must also inform borrowers of the annual percentage rate (APR) of these loans. Which leads to more than 200%!

MISLEADING ADVERTISING

Slick advertising targeted towards borrowers trying to make ends meet is a well-worn marketing tactic in the short-term lending industry.

Often payday loan shops will entice prospective customers by showing them a deal right on the window. It is not uncommon to see displays like this:

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Source: Wikipedia

The question is, how is it possible for these lenders to lend borrowers hundreds of dollars for only $20? In the short term, these lenders make their loans look like a flat fee loan. What the loans really are is an extremely expensive credit card if borrowers don’t pay back the loan in time.

COST CALCULATION

Calculating the Long-Term Cost of a Payday Loan

There are deceptive issues with the so-called flat fee structure that payday loans use.

Take the example above for the CashMoney payday-lending store. If a borrower were to obtain $200 for $20 over two weeks, the APR of such a loan is 260% and would cost:

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Source: The Calculator Site

This doesn’t include additional fees that might be levied against a late borrower. According to MoneySuperMarket, a survey found only half of payday loan borrowers are able to pay back the amount owed in time.

For example, payday lender Check Center charges a $15 late fee when payment is not on time – and doesn’t specify on its website how often this could be charged.

In some jurisdictions, payday lenders are required to notify lenders of APRs – you can see an example chart on the Check Center website. The purpose is to serve warning about the expenses of late payment, which can build up immensely over time for borrowers of these types of loans.

Calculating Long-Term Cost of a Title Loan

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Source: Carbucks

According to Bankrate, the cost of a title loan is usually somewhere around 25% for 30 days.

Borrowers must submit a title and access (usually in the form of keys) to the lender as collateral. These loans are usually a fraction of the value of an asset put up as collateral.

25% every thirty days is 300% APR. If a borrower takes out a $5,000 loan using a title to secure it, to pay it back in one year would cost:

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Source: The Calculator Site

Again, this doesn’t include additional fees that might be levied against a late borrower.

LEGALITY

It’s no wonder that payday loan companies usually set up shop far away from banks and dress up storefronts with colorful, eye-catching signs. If a borrower gets caught in debt to one of these lenders, it is very hard to escape as the costs begin to escalate.

It’s easy to wonder how these lenders are able to stay in business legally – if you fall behind when borrowing money from a payday lender, you can get into some serious trouble.

The Guardian recently reported that the number of complaints about payday lenders in the UK have doubled  in just the past year – sure to bring attention to the problems of payday lenders by lawmakers.

BOTTOM LINE

Stay away from payday lenders. Peer-to-peer bitcoin lending is often a better alternative to borrowing money.

Click here to see how a  bitcoin loan is an option.

Simply put, payday loans are not worth it. There are plenty of other options for borrowers.

Opportunities for Bitcoin in Indonesia

In 2005 I spent three months in Jakarta, Indonesia, teaching at a school for disadvantaged children. The school, established by the Dilts Foundation, provided among other things, education to street kids and other children who did have access to a traditional educational system.

The program I participated in was called “Children of Tomorrow.” Besides teaching the children English, our mission was to provide them the opportunity to develop their entrepreneurial and leadership skills. This enabled them to instill positive change and advancement in their lives.

Teaching through the program was a truly unique and life-changing experience. I was overwhelmed by the happiness of the local people. Although their lives were so challenging and difficult, I was touched by their generosity despite the limited resources they had. I realized that by growing up in a developed country I took for granted things like running water, toilets, and three meals a day.

These children and their families, like almost 80% of the population in Indonesia, had never been to a bank or had access to a bank account. Banking and other financial services are not readily available to the majority of the population. There are various reasons for the high percentage of under-banked in Indonesia.

First, Indonesia is a cash-economy. In Indonesia, they live by the mantra “Cash is King.” It is very much a part of the culture to receive, spend, and save money in cash. In Indonesia, most restaurants, stores, and institutions only accept cash as a form of payment. Even if you have a credit card, many places will not take it.

Another significant reason why people rely heavily on cash is that for many people, financial services are too expensive. With an average monthly income of $200, disposable resources are limited and financial services are not a large priority. Indonesia is an archipelago of more than 13,000 islands; on most islands the banking infrastructure is barely developed. For most banks, it is not profitable for them to establish branches, ATMs, and other services. This leave a significant part of the population without access to banks and other financial services.

A statement often made is that bitcoin can change and improve lives of the under banked. These people have a need for a service that facilitates small transactions in a cost effective manner. Additionally, bitcoin acts as a solution to hold value safely through a provider they trust.

Although the vast majority of the under banked are not very tech savvy and do not have easy access to internet, many have mobile phones. In Indonesia, 84% of the population owns a mobile phone; by developing mobile solutions using the bitcoin protocol, financial services can suddenly become very accessible for these people.

In the past few months, bitcoin has slowly, but steadily gained traction in Indonesia. In December 2013, the first bitcoin exchange opened, bitcoin.co.id. There are several entrepreneurs developing bitcoin applications and services for merchants that have started accepting bitcoin.

BTCJam has seen a tremendous growth of users from Indonesia: more than 1000% in the last three months! Most users from Indonesia on BTCJam are borrowers who take out loans for business activities. Some of these busiesses are even bitcoin related! Borrowers can use loans to buy mining hardware or to trade on LocalBitcoins. These BTCJam users are contributing to the bitcoin ecosystem in Indonesia and they provide liquidity to the local market.

The opportunities for bitcoin in Indonesia are immense: with a population of 240 million, where 80% is under banked, bitcoin can have a significant impact on the lives of at least 190 million people. The “Children of Tomorrow” at the Dilts Foundation and their families showed me how the banking system in Indonesia does not serve the needs of the majority of the population. I believe that bitcoin can increase the opportunities of Indonesians and people in other developing countries by satisfying their financing needs and necessities.

image – Isabelle de Clercq 

Untangling Peer-To-Peer Lending, Crowdfunding, and Microlending

In my previous post, I provided a short overview of the evolution of the lending space and the role of banks herein. Over the past years, especially as a result of the financial crisis and arising regulations, banks have pulled back from issuing loans. This has paved the way for alternative financing solutions like Peer-to-Peer lending, crowd-funding and micro-lending.

The most significant similarity between these three services is that there is no involvement of traditional financial institutions. In this post I will discuss their most important features, explain which markets they serve, and show what their key differences are.

Peer-to-Peer Lending

The core concept of Peer-to-Peer (P2P) Lending is a that a group of investors lend to one person or business without the interference of traditional financial institutions. Usually the investors are individuals who are not related to and do not know the borrower. The development of the internet has enabled this new form of lending: an online marketplace that completely facilitates the loan transaction.

An interesting trend in the P2P Lending space is the increased participation of institutional investors and banks. P2P Lending companies can operate more efficiently thanks to the use of new technologies and less overhead cost, thereby making these marketplaces very interesting for both borrowers and investors. According to Charles Moldow, a partner at Foundation Capital, P2P Lending Platforms have a 400 basis point advantage compared to traditional banks.

A notable player in the field in Europe is Zopa (located and operating in the UK). In the United States, LendingClub and Prosper are the first P2P lending platforms who service the US market. Funding Circle and OnDeck also facilitate small business loans through their marketplaces.

A new and truly unique P2P Lending platform is our company, BTCJam! By using bitcoin as a transaction protocol and a global credit-scoring model, BTCJam is the only P2P lending company that operates worldwide.

 

Crowdfunding

Crowd-funding is based on the same principle as P2P Lending: funding takes place by a group of investors. There are significant differences between the two:

First, crowd-funding is typically used for specific projects or ideas and not for personal loans. The second distinct difference is that investors who contribute to a project do not get interest–instead they’ll receive rewards, special perks, or gifts. For example, they may get the first release of an album or the product they supported.

A new development within the crowd-funding industry is the so-called “Equity-Based” crowd-funding: as a reward, investors receive unlisted shares of the company. Equity crowd-funding has been a popular way of raising capital for companies in Europe and Australia for several years. In the United States, equity crowd-funding is only accessible for accredited investors, but this could change soon based on the JOBS Act. The JOBS Act would let non-accredited investors gain access to equity crowd-funding which would dramatically expand the possibility for startups and entrepreneurs to raise capital. Seedrs is an Equity crowd-funding marketplace that operates only in Europe and has been very successful.

A well-known crowd-funding platform is Kickstarter; people have pledged over $1 billion, funding 65,000 projects. Kickstarter is not equity crowd-funded, which prohibits individuals from making long term equity on the products they invest in.

 

Microlending

The main goals of micro-lending are to financing poverty stricken areas of the world and reach underbanked communities. The loan amount is usually very small and the purpose of the loan is usually for personal use. Many of these loans help to finance medical bills, small businesses, education, and agricultural development.

In P2P lending and crowd-funding, there are multiple investors contributing to the loan, whereas in micro-lending, you often see that also the borrowers team up. Loans are provided to a group of people who will vouch for each other, thereby, minimizing the risk of default.

The first micro-lending initiatives did not have profitability as a driver, but over the years some micro-lending institutions have argued that doing good shouldn’t stand in the way of making profit. Opinions remain divided on the subject.

Grameen Bank is one of the first and leading Microcrediting organizations. Besides micro-lending it also offers other financial services. Kiva created an online marketplace to connect investors with borrowers in developing countries. Kiva works with local field partners who assess, distribute, and monitor the loans.

In the chart below I summarized the characteristics of the three financing solutions. The alternatives to traditional banking loans all serve different markets and it’s strongly recommended to research which solution suits your needs.

image – Isabelle de Clercq 

Milestone: One Million in Loans Serviced On BTCJam in June Alone

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BTCJam is proud to announce that we have hit a milestone of one million dollars (bitcoin equivalent) in loans serviced in the month of June alone! On top of that, we now have over 4,000 loans repaid since November 2012.

It has been an honor to pioneer global peer-to-peer lending powered by bitcoin. From doing experiments with anonymous loans to where we are at today, we are eternally grateful to our supporters and members. It is incredibly humbling to see many businesses get their initial liquidity on BTCJam, watch others fund their projects from America to Argentina to the Philippines, and have people use BTCJam as means of consolidating their fiat debt.

At BTCJam, we have unwavering dedication to provide the optimal platform for our members. We want users to be able to borrow at reasonable rates that they choose while still enabling investors receive healthy returns. We thank all of the investors that have supplied the liquidity that funded over $1,000,000 (bitcoin equivalent) in loans, and thank you to all the borrowers who have repaid over 4,000 loans!

Grow your bitcoins on BTCJam!

– The BTCJam Team

What happens when a borrower does not pay back his loan?

At BTCJam, we strive to deliver the best possible returns with the lowest risk to our investors. We have many protocols to ensure that we feature high quality borrowers while we actively try to filter out scams and bad borrowers.

The first thing we do is to collect various points of identification: ebay, paypal accounts, banking statements, social network information, etc about the borrowers. We verify all those documents and accounts through our experienced team.
Second, we assess the borrower based on his information with our credit scoring algorithm. We assign every borrower a score ranging from A+ to E-, depending on the likelihood that they payback investors.
Finally, the “wisdom of the crowds,” –our dear investors, decide who gets funded. As you may know, an individual is usually not very good at making an estimate, but when you average out the esitmates of a large group of people the outcome is more accurate.  Of course, having multiple investors involved is no guarantee that a borrower will repay, but it is less likely that a large group of people will be fooled by someone compared to just one person. We suggest that investors pay more attention to loans that are funded by multiple people. The returns may be lower, but they are more safe.

On a separate note, make sure that you diversify you investments as much as possible. Learn more about this here:

What happens, if despite of all this, someone still does not pay me back?

If a borrower misses one of his payments for the first time, we try to get in contact with him via email or phone. If we get a hold of them and they manage to pay back with a slight delay, we will accept the late payment with a processing fee and return the money immediately.

If a borrower does not respond to us within 90 days, we start an arbitration process.

What is International Arbitration?

Arbitrators are neutral third-parties to whom the parties yield the power to decide the dispute and render an arbitration award similar to a court judgment while avoiding the cost and delays common in court litigation. Arbitration is a faster, more efficient legal alternative than bringing someone to court. It is interesting to note that arbitration was the only means of resolving disputes for thousands of years before there were courts. Courts actually embrace arbitration to resolve civil disputes since it reduces the size of court dockets. Arbitration is binding (cannot be appealed) and is recognized and enforced in nearly 150 countries under The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). For example, if a Canadian borrower fails to pay back their loan, then a Canadian arbitration company contacts the individual to collect the loan. The arbitration companies we use are similar and often overlap with those used by large corporate banks.

What are the benefits of International Arbitration?

  • Safer investments
  • Debt renegotiation
  • Enforcement

Which loans are susceptible to arbitration?

All loans made after 03/30/2013.

When is a loan sent to arbitration?

When it is overdue for more than 90 days.

Do I need to submit the loan to arbitration myself?

No, the loans are sent to arbitration automatically. The borrower and all the investors will be notified if it happens.

Why get a loan on BTCJam.com?

There are many great reasons to get a loan from BTCJam:

  • Low interest rates
  • Fast and Easy Online Process
  • Available Globally
  • Secure and Confidential

Why do we have low interest rates?

Through our global peer-to-peer lending platform, we have capital from investors in developed nations who are happy with lower returns than most local banks who have high interest rates set by the national banks in most of the developing world

Most developing countries need to attract capital from foreign investors to develop their infrastructure. To be competitive and since there is quite bit of risk involved, they have to offer quite high interest rates to those investors. Since the treasuries they are selling can also be bought by their local national banks, the interest rate banks are giving to consumers are higher as well, since they need to have a similar or higher internal rate of return on consumer lending in order to justify the investment of time and capital.

But with our peer to peer lending platform, as long as we can create a better return/risk ratio for lenders than other alternatives they have access to, we will be able to offer loans to borrowers in those countries at rates that in many cases are much lower than what they can get at their existing banks.

Additionally we screen our borrowers very thoroughly through our innovative, global credit scoring algorithms. Since we are able to predict the likelihood of default pretty well, lenders have confidence and are happy with lower interest rates, since they know the risk they are getting when investing.

Why do we have little bureaucracy?

We do everything online and our innovative credit scoring algorithm can assess your credit score within seconds of your application.

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Traditional banks have to ask you a whole bunch of questions about you before someone in an office decides whether you are ‘credit-worthy’ or not. We also ask some questions, but since we are doing everything online and including information about you from your various profiles on the web, such as Facebook, Linkedin, Paypal, Ebay etc, we can automate a lot of that process and do instant credit scoring based on the information you give us.

Can I get a loan if I am in (INSERT MY COUNTRY HERE) ?

The answer is a resounding YES! By using bitcoin, the community can fund people from literally any country, including Antarctica!

How is my information protected?

We don’t share any personal information about you with lenders or anyone else. We reserve the right to do so in cases required by law or if you specifically give us permission to do that.

Ready to get a loan on BTCJam? Start here

Or read: Is BTCJam right for me?

What is the process of getting a loan on BTCJam?

Getting a loan on BTCJam is a very straight forward process.

Here is how it works:

1. Verify your identity

Verifying your identity is the initial step in applying for a loan at BTCJam. We will ask for your photo ID, address verification, income verification, banking conformation, social network ids, personal references, your Paypal account, and your Ebay account.  The more complete your profile is, the more trust you gain in BTCJam and, thus, the more likely your loan will be funded.

Make sure to use high quality photos/scans, so that our verification team can easily read all the important information from your passport, your income stubs etc.

Do I need to have all of these social networking accounts?

You don’t need all of the items listed above. HOWEVER, our credit score algorithm will likely give you a low rating if you have only a few items verified. The minimum verification we require is your identity and address, but beware, your interest and APR will be extremely high. The more legitimate and trustworthy you appear, the more likely you will get funded on good terms.

How long does the verification process take?

1-2 business days after you have submitted your documents.

2. Describe your loan and decide the terms

Go through our easy loan creation process. Here you can describe why you need the loan and how you will repay it. You can also set the terms: length of the loan, interest rate you want to pay, and frequency of payments.

After that, all you have to do is to hit Publish and you’re all set!

3. Watch investors fund your loan and get the money!

This is the fun part. Watch as investors come in to fund your loan. Of course it helps to tell friends and family about this, as they can increase the speed at which your loan gets funded and it increases social verification for investors.

As soon as the listing has been funded by at least 70%, you can activate the listing! This binds you to the terms you defined in the loan listing in step two.

The best part: The bitcoins are instantly available in your account.

So are you ready to get a loan? Click here to get started!

How to Lend with BTCJam

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What percentage of my portfolio should I allocate to peer to peer lending?

Ultimately only you can know this answer. You should ask yourself

  1. How much risk am I willing to take?
  2. How risky are my other investments?
  3. Can you survive without this money for the next 3-12 months?

The nice thing about peer to peer loans is that they are much less dependent on the overall economic climate  than other investments in general and specifically on interest rate changes than bonds for example. They have a very low correlation (R=0.014) with the S&P 500 returns of the last 5 years. (Source)

What if I suddenly need the money?

We offer a Notes Marketplace where you can sell your notes if you need the money ahead of the repayment date. However, you will likely be offering a discount on the outstanding amount if you want someone to buy it quickly.

Which loans should I invest in?

One of the core things we do at BTCJam is to assess risk. We use more than 50 data points about borrowers before we give them a credit rating. For example, we use info such as: Income, Credit Score, Social Networking Data, E-Bay Feedback scores and then apply machine learning on our repayment rates to figure out who is a credible borrower. Loans rated with an A are more likely to be repaid than those with a B, which are more likely than those with a C, and so on.

Even an individual with an excellent credit score is human and the unexpected, like sickness or job loss can happen. So we strongly discourage putting all of your investments in one or just a few people.

If you diversify your investments well, you will enjoy high returns and low risk. Lenders on our platform are averaging 19% returns per year!

This leads us to the 3 rules of peer to peer lending

Also, you should probably check out the newest listings here!

Why invest with BTCJam?

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Welcome to BTCJam! We are excited that you are joining our great community and that you want to help other people realise their dreams while making solid returns on your investments.

How is Peer to Peer Lending better than other types of money lending?

At BTCJam, we really believe in Peer to Peer Lending, which allows investors to invest directly into borrowers in a very transparent way. This brings three core advantages:

  1. Low fees. The platform usually takes a low, around 1% transaction fee for checking credit/income/address and making the connection possible. This helps make great rates and great returns possible.
  2. Great Rates Since lenders decide who gets funded, the market will adjust interest rates in a way that borrowers will most likely receive the lowest possible interest rates they can get (otherwise they would leave for another service) and investors will get a high return/risk ratio (otherwise they would invest their money in other opportunities offering better return/risk ratio).
  3. Diversification Investing in peer to peer loans offers a very strong diversification from the stock market, as evidenced in this Seeking Alpha article: It summarises: “In this regards, and considering the affordable diversification, low correlation to the Stock Market and above-average returns, even after considering defaults, Peer Lending remain an attractive alternative asset.”

Why invest with BTCJam specifically?

There are many great reasons to be investing with BTCJam. On top of the ones listed above, BTCJam offers

  • Even Better Returns. Check the returns of our best investors on our leaderboard!
  • Even Lower Risk through extensive geographic diversification. We are the only site that operates globally!
  • Help People in economically underdeveloped regions getting a credit for the first time and starting a new business or even new life!

Better Returns

Most developing countries need to attract capital from foreign investors to develop their infrastructure. To be competitive and since there is quite  bit of risk involved, they have to offer quite high interest rates to those investors. Since the treasuries they are selling can also be bought by their local national banks, the interest rate banks are giving to consumers are higher as well, since they need to have a similar or higher internal rate of return on consumer lending in order to justify the investment of time and capital.

But with peer to peer lending, as long as we can create a better return/risk ratio for lenders than other alternatives they have access to, we will be able to offer loans to borrowers in those countries at rates, that in many cases are much lower than what they can get at their existing banks.

Lower Risk

Since successful lenders are spreading their investments across many different borrowers across many different geographic and economic regions, they face a very low correlation of default between the rates.

Read more in our article How to Diversify we explain more in depth why the risk is lower and how our model allows investors to diversify really nicely.

Helping People: Socially conscious investing with BTCJam

Did you know that borrowing money can be a serious challenge depending on your credit situation or if the need of it is immediate? Around the globe, good people who can afford paying the cost of money, need to borrow it but can’t do so immediately. There are many roadblocks, the main ones being a high level of bureaucracy and incredibly high interest rates.

For example, in Brazil, if you have outstanding credit card debt, you are paying almost 200% APR (yes. two hundred percent).(Source: http://www.imf.org/external/pubs/ft/scr/2013/cr13149.pdf )

In many other countries around the world, people are facing similarly harsh conditions to get credit at reasonable rates.

The concept of peer-to-peer lending is already, by itself, a more democratic way to loan money. But, unfortunately, since we have countries and currencies boundaries, current peer-to-peer lending platforms don’t reach people located in developing countries or the poor people who happen to not have a great credit score yet. People who need it the most. With BTCJam we offer you the possibility to work with Bitcoin, so can take, together, this real first step to credit access around the globe.

We all know how necessary and, why not, fun, it is to make a profit. However, our conscience never allows us to forget about our responsibility to build a new and better world. How does it sound to actually help, solving people’s financials problems and at the same time you are getting paid for it?

It is possible. It’s already happening here at BTCJam.com.

Check out the newest listings we have for you on BTCJam.com