It’s easy to be skeptical of lending companies of every stripe. They uniformly rely on customers who don’t have enough money to cover their bills and are willing to pay interest on money borrowed in exchange for capital they can spend sooner — sometimes immediately.
Unfortunately, those consumers with the worst credit, or no credit at all, are sometimes left with few options other than to work with payday lenders that typically charge astonishingly high annual percentage rates. Until recently, for example, the state of Ohio had the dubious distinction of allowing payday lenders to charge higher rates than anywhere else in the country — with a typical ARR of 591%.
It’s one reason that venture capitalist Rebecca Lynn, a managing partner with Canvas and an early investor in the online lending company LendingClub, has largely steered clear of the numerous startups crowding into the industry in recent years. It’s also why she just led a $10.5 million investment in Possible Finance, an outfit that’s doing what she “thought was impossible,” she says. The two-year-old, Seattle-based startup is “helping people on the lower end of the credit spectrum improve their financial outlook without being predatory.”
At the very least, it’s charging a whole lot less interest on loans than some of its rivals.
Here’s how Possible Finance works: a person pulls up the company’s mobile app, through which she shares the bank account that she has to have in order to get a loan from the startup. Based on her transaction history alone — Possible doesn’t check whether or not that person has a credit history — the company makes a fast, machine-learning driven decision about whether a loan is a risk worth taking. Assuming so, it then transfers up to $500 to that individual the following day, money that can be paid over numerous installments over a two-month period.
Those repayments are reported to the credit agencies, helping that person either build, or rebuild, her credit rating. If the money can’t be repaid right away, the borrower has up to 29 more days to pay it. ( By federal law, a late payment must be reported to credit reporting bureaus when it’s 30 days past due.)
Promise has immediate advantages over some of the many usurious lenders out there. First, it gives people more time to pay back their loans, where traditional payday lenders give borrowers just 30 days. It also charges APRs in the 150% to 200% range. That may still seem high, but as Promise’s cofounder and CEO Tony Huang explains it, the company has to “charge a minimum amount of fees to recoup our loss and service the loan. Smaller ticket items have more fixed costs, which is why banks don’t offer them.”
More important to Lynn, traditional payday loans are structured so those payments don’t impact credit scores, often trapping consumers in a cycle of borrowing at excessively high rates from shady issuers. Meanwhile, Promise, she believes, gives them a way off that path.
Yet Promise has another thing going for it: the apparent blessing of the Pew Charitable Trust’s Alex Horowitz, who guides research for Pew’s consumer finance project. As Horowitz tells us, his group has spent years looking at payday loans and other deep subprime credit lending for years, and one of their key findings about such loans “isn’t just that interest rates or APRs are high, but they’re unnecessarily high.”
In fact, though payday lenders once warned that they would exit certain states that set price limits on how much they can wring from their customers, a “kind of remarkable finding is that states are setting prices as much as four times lower — and these lenders are still coming in and providing credit.”
Horowitz gives Promise credit for not pricing its loans at the ceilings that those states are setting. “Usually,” he explains, “customers are price sensitive, so if a lender comes in two to three times lower than others, they’ll win a lot of customers.” That’s not true in the market in which Promise is playing, says Horowitz. Customers focus on how fast and how easily they can line up a loan, making it “unusual for a lender to offer loans that’s at a price point far below its rivals.”
Worth noting: Ohio, which once allowed payday lenders to get away with murder, is one of those states that more recently implemented interest rate ceilings, with a new payday lending law that went into effect in late April. It’s now one of six states where Promise operates (“with many more to come,” says Huang).
Promise, which currently employs 14 people, has processed 50,000 loans on behalf of users since launching the product in April of last year.
With its new round of funding, it has now raised $13.5 million altogether, including from Columbia Pacific Advisors; Union Bay Partners; Unlock Venture Partners, and angel investor Tom Williams.