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Beware the Payday Predators on Your Phone
Dave and SoLo Funds charge crazy interest rates and profit from debt trap lending
Stories about two fintech lenders supposedly attempting to disrupt the payday loan space - but instead, just exploiting borrowers in desperate situations.
Cash from a Cartoon Bear
Dave’s mascot is a friendly-looking cartoon bear and the app provides small dollar, short-term loans that they claim are cheaper than payday loans. Need $100 fast? Dave will transfer the money in an app on your phone and you can pay it back in a few weeks, plus a “tip.”
Here’s more on the tip-based lending model used by apps like Dave:
A story from the L.A. Times digs deeper, explaining just how bad the fees associated with friendly, cartoon bear apps can be.
Here’s how the Times broke down the fees associated with a loan from Dave:
Given that the money had to be repaid in 12 days, the $5.99 fee and $2 tip, if considered as interest, cost Goad 122% on an annual percentage rate basis — a metric that helps compare the relative cost of loans. If he tipped $6.93, the company’s average in the first quarter, it would amount to an APR of nearly 200%. If he chose a 15% tip, the total cost would rise to $35.99 with an APR of 547% — corner payday loan territory.
That’s really not great.
What’s more interesting is where Dave is getting all this money to lend.
Apparently, a big investment ($100 million) came from embattled crypto company FTX.
CNBC has more:
Through its FTX Ventures unit, the crypto firm in March invested $100 million in Dave, a fintech company that had gone public two months earlier through a special purpose acquisition company. At the time, the companies said they would “work together to expand the digital assets ecosystem.”
Of course, FTX is now in a bit of trouble. What does this mean for the money the cartoon bear used to front loans at ridiculous interest rates?
In explicitly linking the two $100 million investments to customer money, the SEC has raised the possibility that they’ll be prospects for clawbacks. If FTX bankruptcy trustees can establish that client money funded Bankman-Fried’s investments, they could pursue recovery of those funds as part of an effort to retrieve customer assets.
That’s not good news for the bear.
Of course, Dave is kind of struggling anyway.
Dave shares have plummeted over 97% since the company went public, mirroring the performance of the broader basket of SPACs. In July, the Nasdaq warned Dave that if its share price didn’t improve, it was at risk of being delisted. The stock currently trades for 28 cents and the market cap sits at around $100 million.
Turns out, fintech lenders so far have NOT been able to replace payday lenders — even when they charge crazy interest rates and borrow money from fraudsters.
Another so-called disrupter is SoLo Funds.
Believe it or not, this peer-to-peer lending app offers loans with rates that can exceed 4000%.
When regulators in one state tried to shut them down, they launched an online petition asking for the right to “help people” while making a profit.
Pitting themselves as a sort of David fighting financial goliaths, SoLo says in its petition:
People should be able to help people. We should be able to transact with each other directly. And we should be able to benefit or profit from that. This concept is not new. It’s just not popular because it doesn’t profit those with economic power.
It’s not clear how helpful it is to offer short-term loans with interest rates exceeding 4000%.
This is especially true in a climate where lower cost alternatives to payday lending are emerging.
A case against SoLo Funds out of Connecticut highlights the predatory nature of the online lending platform:
“Respondent has represented to the Department that ‘Borrowers may opt to include a Lender Tip or a SoLo Donation, but neither is required to submit the Loan request nor to receive a Loan.’
Nevertheless, 100% of the loans to Connecticut residents originated on the Platform from June 2018 to August 2021 either contained a Lender Tip or a SoLo Tip. In addition, Respondent recommends that consumers ‘Tip’ to receive a loan.”
Based on Connecticut’s analysis of loans facilitated in the state, the typical principal amount was $100, with an average ‘lender tip’ of $21 and an average ‘donation’ to Solo of $10 — equating to APRs that ranged from 43% to as much as 4,280%.
This is what they are petitioning to preserve — short-term loans with crazy high interest rates.
I guess that’s what they mean when the petition says:
And we should be able to benefit or profit from that.