24% per year is a lot! Why do you think it is OK to charge such high interest? 

You're right. 24% is a high interest rate to charge for a loan, but the unfortunate reality is that making small loans is relatively expensive, and we are an order of magnitude cheaper than the existing alternative (Tennessee payday lenders charge up to 460% per year). We don't think that those who are less able to afford a loan should face rates that make their loan even more difficult to pay, but we also aim to be financially sustainable at scale without perpetually relying on grants and donations.

Our loans are also installment loans, so the interest rate is being applied to a shrinking principal balance. This means that on a $1,000 loan paid over a year at 24% per year, a BetterFi client will pay just under $135 in interest over the entire year. At the maximum we will charge, 28% per year, that client would pay just over $158 in interest.

Lending money has relatively fixed costs that change little as loans get larger in size, and this is part of the reason why conventional financial institutions like banks have shied away from small consumer loans. When we make a small loan, our interest must cover not just the costs associated with the loan, but also fixed costs (like equipment costs, compliance costs, utilities, our employees’ wages), and then the cost of funds if we are borrowing from a bank to make additional loans (they do not provide it to us at 0%). That does not even include the costs to provide free coaching, free income tax preparation, or other types of free financial programming.

If we seek to be financially sustainable, the interest rate on our loans must also cover the money lost on loans that are not repaid. Even one of the best-run community lenders has a repayment rate of about 94-95%, meaning that 5-6% of their loans are not being repaid. We hope to reach repayment rates that are that high.

We would love to charge 4% rather than 24%, but we would lose our money within a year and be no help to anyone. Consider just one of our costs, a single paid employee's yearly wages of $35,568: We would need to disburse more than 1,630 year-long $1,000 loans at 4% and have every loan repaid perfectly to cover this cost alone. If even 1% of those loans were not repaid, we would need to disburse 749 more perfect loans to cover the lost ones. One employee, of course, is not our only expense. The realistic costs of disbursing, administering, and servicing that many loans with no additional cost is a non-starter, and we would rather be an existing alternative to car title and payday lenders than a theoretical one.

Lastly, we hope to be a temporary stop for our clients. As borrowers take loans from us, we hope to help them build their credit score so that they can eventually access more reasonably priced financial services.

A number of finance and banking professionals do not think that we can do this successfully even if we charged 30% or 40% -- we are hoping to prove them wrong. If we find at the end of our pilot that we can do it even more cheaply, we will reduce our rates.

What are the hidden fees? What's the catch?

BetterFi has no hidden fees alongside its loans. Other places have origination fees, customary fees, administration fees, insurance fees — we do not. Apart from late fees, everything we charge is captured in our interest calculation. The maximum interest rate we charge is 28%, but the average across our portfolio is just over 20%. We specifically chose a lending license in Tennessee that lumps interest and fees together in terms of dictating what is legally permissible to ensure transparency to our clients.

The loan documents that we use show the borrower the total amount he or she will borrow, the total amount in interest and fees, the amount they will pay each month and when those payments are due, and also show the total interest and fees as a percentage of the borrower's principal amount. We caution readers of press or news articles regarding us and our loans to be aware that numbers are occasionally rounded up or down in the editing process, and do not always reflect the exact amounts of our real loans.

How much of a borrower's income will go toward paying off their loan?

Ideally we will never require more than 10% of a borrower's income to go toward paying off his or her loan, though circumstances may dictate different scenarios. We work with our borrowers to determine an amount that will strike a balance between shortening the life of the loan while also being a reasonable installment payment. When we meet with borrowers we go through their existing income, expenses, and debts to determine a path forward that seems realistic, helpful, and that they find agreeable.

Especially if a borrower has been paying a substantial amount per month on a series of predatory loans that possibly will stretch on indefinitely, we often can create a payment plan that will allow them to reduce their monthly payments while paying off the loan relatively quickly. We see this as a win-win as their payments become less and they pay off the loan quickly, even if it does not meet our ideal of requiring no more than 10% of a borrower's income. 

How can this be a non-profit?

Our first and foremost goal is alleviating poverty by providing more affordable routes out of dependence on predatory loans. Poverty has structural causes that we cannot even hope to begin addressing, but we can at least mitigate some of the impact by limiting the extreme indebtedness caused by predatory lending. In a world with less existing poverty, stricter laws on predatory lending, subsidized consumer finance, or even a universal basic income, perhaps we would not be needed. We hope to work ourselves out of existence.

That being said, in this world, non-profits must still pay the bills. We opted to form a non-profit under 501(c)(3) specifically to avoid having profit-motivated shareholders, and more specifically to avoid having our program’s existence be dependent on a bottom line. We still must be financially sustainable, and even non-profits must generate enough money to operate (typically via donations and grants).

If we are able to create a model that can be financially sustainable at scale, then any profit made by BetterFi will go toward that first goal whether by reducing interest rates, increasing the flexibility of loans, increasing our geographic footprint, developing additional financial literacy and coaching programs, or reaching new clients.

So who exactly is making money off of this, anyway?

As a Tennessee non-profit corporation and a non-profit under article 501(c)(3), there are no shareholders collecting dividends or building their equity with BetterFi. The decisions within BetterFi will never be made to maximize profits, but only to maximize our potential impact in terms of alleviating poverty and saving our borrowers' money. 

Our expenses include compliance and registration costs with local, state, and federal authorities, paying for internet and phone in our office, supplies, minimal travel, a loan management system, and three paid employees, the average incomes of whom are approximately equal to the average teacher in Grundy County, Tennessee. Our federal tax form 990s are publicly available, and we will additionally make them available through organizations that focus on nonprofit transparency like Guidestar.

We are targeting disbursal of $1.5 million in loans over the next few years. In Tennessee, a typical flex loan carries an effective annual interest and fee rate of 276%, and the typical flex loan is not paid off within a year. Deploying $1.5 million would save our clients a very conservatively estimated $2.8 million. In that case our borrowers may not be making the $2.8 million, but they certainly are keeping it.