While overdraft fees are “technically” not a loan, if you were to consider overdraft fees in a lending context, the calculation would be as follows: if you were to take out a $24 standard loan and pay an additional $34 to borrow the funds for three days, this loan would have a 17,000% APR.⁵ In total, Americans spend $24.5 billion dollars a year on bank overdraft fees.² Typically, if an account is not positive within 5 to 7 days, the account holder gets hit with another $34 fee. Whether an overdraft amount is $1 or $1000, the average overdraft fee is $34. Keep in mind that bank overdraft fees can be the only option people have who have little to no credit history, as they cannot even qualify for a payday loan. Bank overdraft fees account for 62% of all spending by underserved consumers on single payment credit products.² Of the people who overdraft, one-third report they did so primarily as a way to borrow money, and the median that shortfall borrowers are trying to bridge is $24 for three days. Now the borrower has even bigger problems.īank overdraft fee: Perhaps an even more egregious product is the bank overdraft fee. However, lenders can be very aggressive and sue for wage garnishment and other recourse. To do so, they either do not deposit money into their bank account or they close their bank account altogether. In each two-week cycle, three percent of borrowers charge off, or default on the loan. Of those borrowers who eventually pay off the loan, 41% report that they pay it off with some type of windfall - a tax refund, help from a relative, a second job, etc.
The borrower’s options are to payback the loan in full, take out another loan, or pay another $55 to keep the loan out for another two weeks.The typical borrower keeps the loan out for five months and pays an average of $520 in fees on top of the $375 they originally borrowed. On average, this payback is 36% of the borrower’s next paycheck.
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It comes due in 2 weeks, and the borrower must pay an average fee of $55 PLUS the total amount of the loan in full at their next pay-cycle. Payday loans: The average payday loan is $375. It is helpful to understand how both work in order to fully appreciate the alternative provided by Possible Finance. Possible Finance provides this solution.įor perspective, two pervasive types of single payment loan options are payday loans and bank overdraft fees. The better solution is an installment loan product with a manageable rate that helps build credit history so that the borrower will have even better credit options in the future. According to the Federal Reserve, about 46% of Americans report they don’t have enough to cover a $400 emergency expense.¹Įxisting short-term credit options are almost entirely single payment products.These products are expensive, don’t build credit history, damage credit history because they pull a credit report, and become debt traps for borrowers who cannot pay them back. These loans provide a cushion to get through the financial bumps in life. While one can argue that all debt is bad, the reality is that people at every level of the credit spectrum need access to short-term loans from time to time. As they build deep and trusted relationships with their customers, they will be able to leverage data and build out other tools and non-loan products that can further improve individual financial wellness. They are starting with affordable short-term loans because this product is needed most by so many people. The mission of Possible Finance is to improve the financial well-being of people that typically fall outside the scope of traditional financial services. Possible Finance is accomplishing this as a mission-driven company that leverages machine learning to do good while building a profitable business. They are helping people on the lower end of the credit spectrum - those with little to no credit history - gain access to credit and improve their financial future without being predatory. Possible Finance is doing what I previously thought was impossible. Founding Team of Possible Finance: Prasad Mahendra, Tyler Conant, Tony Huang
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