One argument that payday or small dollar lenders like to make is that they fill a critical need. They lend money, they say, to consumers who have an urgent need but can't get credit anywhere else.
But many consumers now have another, less costly alternative in one of the emerging credit products specifically targeted to those with badly damaged credit. Yes, the interest rate is high, but not nearly as high as the 400% consumers typically pay to a payday lender.
A report this month, published in American Banker, had some encouraging news. It found that so-called fintech companies are creating credit products that may serve as a more affordable alternative to payday lenders.
Some are non-traditional sources of money and some, the report noted, require further evolution. But some take the traditional form of a credit card.
A recent entry is a company called FS Card, a start-up aimed at helping cash-strapped consumers meet an emergency expense. Its card is called Build and is available for consumers with credit scores between 550 and 600.
The company describes Build as "a transparent, flexible, and affordable credit card alternative to small-dollar loans and other types of expensive and restrictive short-term borrowing."
One thing that sets Build apart is that it handles unsecured debt. Many subprime credit cards require a security deposit, often in the amount of the credit limit. In effect, consumers are borrowing their own money.
The American Banker report also highlights Elevate, a fintech company that has a division called The Center for the New Middle Class. The center's mission is to develop affordable and manageable credit products for subprime consumers.
The gap between need and availability
“The fact that 69% of nonprimes are unable to cover an urgent expense of $500 with their savings highlights the gap between need and availability of borrowing options," said Jonathan Walker, the center's executive director.
Among the company's products is Rise, an unsecured loan for consumers "living paycheck-to-paycheck." However, it is not offered in all states.
Opportun is another lender with loan products for consumers with iffy credit. The company says it uses advanced data analytics and other tools to score consumers often considered "unscorable" by the three major credit bureaus.
"In recognition of Oportun’s goals of increasing economic opportunity for its clients, promoting community development, and serving low-income or underserved communities, Oportun is certified by the United States Department of Treasury as a Community Development Financial Institution or CDFI," the company says on its website.
A recent report by the Harvard Kennedy School finds there is reason for optimism that subprime consumers will soon have even more alternatives to payday lenders. The report found that nearly all fintech products now available to those with low credit scores are better options than going to a payday loan store.