Inc.Great article from Sonya Mann of Inc. on Max Levchin’s views on the ethics and numbers around cost of loans, payday lending and predatory lending.
Really sticking out was this paragraph looking at the ‘cost of money’:
"Levchin gave the hypothetical of a weeklong loan for $100 with 100 percent interest, meaning that $200 would be due back to the lender. "To a regular person on the street who is in desperate need of $100 right now, and knows that they will get paid a week from today, it's not a bad value proposition." Liquidity is important and money has time value; those are the features for which people pay interest in any lending or credit situation.
However: "The thing that breaks the system, that really pushes people into permanent debt, is the ability to refinance your own loan," Levchin said. If you can't pay the lender the entire $200 when it's due, and the interest keeps compounding, you can find yourself in a hole. Levchin says his motivation is to provide a transparent alternative that doesn't hijack human psychological blind spots"
This is a challenge that has always affected financial services, from the “extortionary” interest rates of inefficient but mission-driven microfinance institutions, to payday lenders comparing and defending themselves to customers against real-world alternatives.
Read the full article.
