9 ms·

ZestCash is Not Good.

243 points by jfager 16y ago

GICodeWarrior 16y ago
It is pretty crazy how many media outlets will publish articles written by companies without even fact-checking them.
- NathanKP 16y ago
  For them it doesn't pay to fact check. In the media business it is all about getting a breaking story out there quickly, and if they waste time fact-checking they are losing readers who are getting the story elsewhere. Clearly this isn't good, but it is the price that we pay for demanding fast, instant news.
  - icefox 16y ago
    At the same time it seems like those who would actually fact check would have a story that no one else has.
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twidlit 16y ago
This is what was lost when blogs overwhelmed journalism. Fact-checking, accountability and misaligned curation but I am hopeful blogs will evolve over time to incorporate them back.
- mahmud 16y ago
  Startup coverage has always been done without the slightest of fact checking. Read your local bigtown paper sometime, and see how bubbly they are about startups, specially local ones.
- Cushman 16y ago
  They already have. You're reading the fact checking right now. News corporations may be more consistent, but do you really think they're more trustworthy?
  - amadiver 16y ago
    Who's watching the watchmen? How do you know that this blog has their facts straight? Have you read any rebuttals to this post? (Already, certain issues that seemed outrageous have been deflated by other commenters.) *For the record, I feel like being "evil" means to prey on human weakness, for which it seems like the site in question and PayDay loans generally fit that bill.
    - Cushman 16y ago
      Who's watching the watchmen? How do you know that this blog has their facts straight? Have you read any rebuttals to this post? I can't answer those questions any better than you already have: (Already, certain issues that seemed outrageous have been deflated by other commenters.)
      - amadiver 16y ago
        I liked this answer enough to upvote it, but my honest question (the parent) has been downvoted. Could someone share some insight why? I switched from Reddit to HN because I thought this community was less prone to stuff like that, but maybe I'm being too sensitive?
andrewljohnson 16y ago
I hate to see entrepreneurs acting like predators. I like to think we are in it for noble reasons - advancement of humanity, crucial innovation - you know, changing the world. But cold hard cash rules for many. It makes a certain kind of sense that a guy who left Google for BMG would be capable of such a scummy company.
- gcheong 16y ago
  Easy to say it's predatory but I'm not convinced. These are high risk loans so who's to say that the interest rates and fees charged aren't reflective of that risk? On the other hand I am willing to entertain the idea that if the people who most often used these places don't have access to these loans at all maybe they would be better off.
  - andrewljohnson 16y ago
    Who's to say crack isn't fun for some people? You're still a criminal and a drag on society if you sell it. It's not that I don't think the rates reflect the risk... it's that I think these rich bastards are saddling poor people with loans, and they expect a good portion of them to drown in the loans. They charge these rates so they can recover vast losses... in the end, the honest people get screwed and even the dishonest borrowers get buried in a tar pit of debt.
    - gcheong 16y ago
      Your analogy with drug dealing is quite apt. Because what happens when people can't get what they want through legal channels? Black market. Loansharking. Broken kneecaps. Payday loans may seem to reflect the worst of our society but in actuality they are a step up from other alternatives.
      - tptacek 16y ago
        Your argument is that loansharking would be just as prevalent as payday loans, once payday loans are outlawed? You can get a payday loan within walking distance of most every block in the city of Chicago. You can't even legally be a loan shark.
mahmud 16y ago
Even VentureBeat did a positive "review": http://venturebeat.com/2010/10/12/douglas-merrill-zestcash/ http://venturebeat.com/2010/10/12/douglas-merrill-zestcash/
tlb 16y ago
I gather that the default rate for payday loans is several percent per month, so you'd lose money charging 30% APR (2.2% / month). Can anyone point to a good article on how the industry works and who their customers are?
- bryanh 16y ago
  I don't have a link, but Planet Money did a great podcast on payday loans.
- gatsby 16y ago
  Here are a few articles I've read that you might find interesting. The first is NPR's brief look into the payday loan business as a whole and the second demonstrates the wild rate at which these loans are being issued (£1.2 billion issued in 2009 and estimates of £3.5 billion by 2014). http://www.npr.org/templates/story/story.php?storyId=127220540&ps=rs http://www.npr.org/templates/story/story.php?storyId=1272205... http://www.google.com/hostednews/ukpress/article/ALeqM5h5YQzdFD_fFbk8hxhJYGlOaTb1ig?docId=N0234131286895626812A http://www.google.com/hostednews/ukpress/article/ALeqM5h5YQz...
patio11 16y ago
I'm really sorry that Prosper didn't prosper, because I thought that P2P lending would be an excellent alternative to payday loans. It made huge sense to me that if one person in a community has money and one person in a community needs money, then if they trust each other, one guy pays a modest APR and everyone walks away happy. As it turns out, Prosper couldn't beat the payday loan companies because the people who need payday loans are atrocious credit risks and they collectively relieved us lenders of hundreds of millions (cough, not a typo) before we wised up about this.
- patio11 16y ago
  Incidentally, if someone wants to brave formidable regulatory barriers, beat Paypalian levels of fraud, and spend their days dealing with the problems of the underclass, this is a multibillion dollar opportunity and you'd create more wealth for the poor than anyone since Walton.
  - scottkrager 16y ago
    Lending Club? (I've invested in both Prosper and Lending Club)
- megablast 16y ago
  The problem is with payday loans, that one party can not really be trusted. This is one of the reason the rates are so high, so many people default. People who can not manage their money are not the best of people to lend to.
  - dionidium 16y ago
    People who can not manage their money... I realize that this is sort of a personal nitpick and that it does nothing to invalidate your central claim, but when you make minimum wage and your car breaks down there's not really any money to manage. The thing about living paycheck to paycheck is that unexpected expenses are insuperable (by definition).
    - 16y ago
deleted 16y ago
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klync 16y ago
Haters gonna hate, bro! I'm sure there's a reasonable explanation as to why TechCrunch and other industry insiders are swooning over their newest darling startup. I'm sure it has nothing to do with who's in the in crowd and who's not. After all, silicon valley, and the tech industry as a whole, is a pure meritocracy!
olegkikin 16y ago
They offer $500 for 6 months with $33.5 weekly payments. So you will end up paying 33.5 * 52 / 2 = $871 ($145.16 per month). Isn't it cheaper to get something like this on Prosper or Lendingtree?
- jakewalker 16y ago
  The people who get these will never qualify for a loan on Prosper or Lending Tree due to low credit ratings, etc.
ashleyw 16y ago
APR is pretty irrelevant for payday loans. If my math is correct, even at the highest quoted 462% APR, a £100 loan for 10-days would have a fee of ~£5. Compared to ~£16 for the rest of the payday industry, that's not too bad. In reality they're an awful source of funds if you've got other options, but that's the point, they're for people who can't get a traditional loan, and whom are most likely high-risk.
- tptacek 16y ago
  It's not that simple. For people with no income, there is no ethical way to price a loan; the loan is going to blow up. Meanwhile, for people who do have incomes, there usually are better options than payday loans (credit union loans being an example). The problem is that they don't offer the convenience that a payday loan does; you can't walk into a credit union on a Thursday night at 11PM and get a loan.
- mynameishere 16y ago
  Even 1 day paper uses annual rates. http://www.federalreserve.gov/releases/cp/ http://www.federalreserve.gov/releases/cp/ When your cost of money is 30000 basis points, it just means that you're shifting default risk from the landlord/doctor/drug dealer to a speculator, aka "loanshark". That's why it's not so predatory as it seems. Would you rather people shaft the dentist or some asshole?
  - mdda 16y ago
    I work in the (junk) bond markets. There's a clear distinction between Yield-to-Call paper (which is priced so that different bonds are priced based on the yields they offer) and paper that trades on a 'price basis' (i.e. recovery rates in default are a very major consideration). For the 'price based' bonds, the APR (or IRR) is a nonsense measure : because it is only considering the best outcome (payback at maturity). Most people don't understand that the high IRRs exist partly because people are bundling the price-effect of the downside case into the single 'yield' number of the best case. I don't want to defend payday loans really - just point out that Treasury Bonds and (say) Lehman bonds are two very different animals.
- 16y ago
abthomson 16y ago
It's not clear why the author decided to compare a ZestCash loan with credit cart debt when they're clearly different products. And while ZestCash's rates of 242% to 462% are high, they are, under certain circumstances, competitive. For example, in Washington state, MoneyMart charges in the 300s. Source:http://www.moneymart.com/MM/_includes/templates/StateRates.asp?pdf=WA_CTP&state=Washington&st=Money+Mart http://www.moneymart.com/MM/_includes/templates/StateRates.a...
- jfager 16y ago
  The point about credit cards was made because it's advice given to middle class consumers. I assume if 30% is too high for people with money, it's even more so for people without. From the perspective of the business making the loans, of course they're different models. I don't see that as the most important perspective, though. And the fact that ZestCash is competitive with other usurious lending companies really does nothing to improve my opinion of them.
vaksel 16y ago
i know we are not supposed to judge a book by it's cover, but man does the ZestCash CEO look like a snake oil salesman: http://gigaom.com/2010/10/12/zestcash-judges-creditworthiness-with-data-analysis/ http://gigaom.com/2010/10/12/zestcash-judges-creditworthines... also you know it's a scam, when the site's page rank, alexa rank and compete rank are set to private.
- wilschroter 16y ago
  I know Doug Merrill personally and he's one the smartest, most forthright guys you'll ever meet. You're dead wrong to judge him otherwise on his picture or anything else.
  - danielnicollet 16y ago
    his alexa rank is not "set to private". what are you talking about??? http://www.alexa.com/siteinfo/zestcash.com# http://www.alexa.com/siteinfo/zestcash.com# didn't check the rest.
    - vaksel 16y ago
      I use a special plugin that tells me all those numbers automaticlaly...maybe it considers an alexa rank of 4,343,216 too high to fit in the space. but that number is horrendous...it's like 10 hits a month
      - phpnode 16y ago
        If it's a new site, what the hell do you expect? No wonder there's no pagerank or alexa rank yet, it's too early.
  - lisper 16y ago
    I have also had personal dealings with Douglas Merrill, and I found him to be a thoroughly dishonorable person.
  - vaksel 16y ago
lionhearted 16y ago
> The Center for Responsible Lending, which is frequently mentioned on ZestCash’s website at the time of this writing, supports a 36% annual interest rate cap. I used to think this way until I met a guy who was doing research into opening a payday loan shop. Taking a bit of risk and being blunt, I said to him, "Hey dude, you know, I like finance. I get finance, it's good. I'm not a person who just bashes finance because I'm ignorant... but c'mon, aren't payday loans, like, totally fucking evil?" He took it in a good spirit and answered. Here's his take: The first thing he said is that payday loan shops don't charge a huge APR, they charge a flat fee for getting a payday loan, often $20 or $40 on a $500 loan. That's 5% to 10% of the loan amount, however, if you average that to APR you get a crazy %, something in the low thousands, like 1000% or so. So I said, "Well, dude, yeah, 1000% is evil. Right?" He says, and I'll never forget this, "What do you think the default rate is on a payday loan?" I said, "Well, jeez, I dunno..." He said, "Okay. It's really high. Many of them don't get paid back. And it's a shitty business to be in, nobody likes selling payday loans. The price of a payday loan is what it is considering the default rate and the unenjoyableness of the business. If someone found a better system or enjoyed it, they could get in with lower rates. Traditionally banks don't want anything to do with it, since it's such a high risk and unpleasant business." I said, "But... isn't that taking advantage of people?" I won't forget his second quote either - "People only go get a payday loan when, for whatever reason, they can't get money anywhere else. If payday loan places didn't exist, there'd be no emergency credit for people. Mind you, these are the worst borrowers. These are people with no savings who no one trusts enough to lend them 500 bucks for two weeks. Do people abuse it to go drinking a week early? Yeah, sure, like anything else. People abuse eating fast food, drinking too much, tobacco, all sorts of things. I don't approve of that. But for other people, a payday loan is a lifeline. If you regulate it so you can only charge $5 for a $500 loan, there won't be payday loan shops any more. They won't exist. And that'll be bad for people who desperately need credit and can't get it elsewhere. The people that complain about this aren't doing anything to help people, they're not opening a shop to compete with more fair rates, because they'd go out of business. They just like to talk about how unfair it is, but haven't thought about what to do after they drive all these shops out of business with their regulation." He explained some valid reasons for people to get a payday loan - car breaks down and they need to replace it, emergency expenses... he said under those conditions, it can make sense to get a payday loan. And with the huge default rates, the payday shops need to charge a large amount to stay in business. Later he went on to say that people really like making money by lending, so if they thought they could beat a CD or bond rate by lending for low amounts at payday shops, they would. The reason it doesn't happen is because of the default rate and how unpleasant the business is. (No prestige, in fact it's anti-prestigious, and not fun working conditions either) Changed my view on the industry. Still don't like the business, would never go near it personally. But it puts it into context some.
CoryOndrejka 16y ago
From details on ZestCash's website, there are four fairly substantial ways in which they are different than payday loans, which the original author seemed to dismiss. First, ZestCash is charging a substantially lower APR than payday loan shops (280% versus 480%). Second, ZestCash allows partial repayment. This is critical, as requiring full repayment is a major factor in forcing payday loan customers to rollover their loans, incurring additional fees and leading to additional loans. Partial repayment is far more likely to result in a customer who can actually pay off their loan and is not trapped in a cycle of debt. Third, ZestCash further increases the chances of repayment by allowing flexibility in both amount and length of the loan. Fourth, as the Center for Responsible lending points out, most payday loan employees are minimum wage and not trained to help customers in any way. Anyone approved at ZestCash gets a personal representative who will work with the customer 1-on-1 for the life of the loan. Time will tell whether the ZestCash team is able to generate positive change for the underbanked -- full disclosure, I've worked with Douglas and think he's very sharp -- but I certainly think their story is a lot more balanced than the original article would suggest.
- jfager 16y ago
  I do dismiss those. First, ZestCash is charging a substantially lower APR than payday loan shops (280% versus 480%). You're cherry picking one of their lowest rates and putting it against the assumption that someone's going to roll a payday loan 7 times. If you actually click through and read the CRL report they're quoting, you'll notice that they're misusing the statistics. ZestCash claims that the CRL reports that 80% of payday loans are rollovers, but when you click on that link, the CRL page you're taken to doesn't give that statistic anywhere. I've only skimmed the full report, but I haven't been able to find where they're getting that number from. I'm left highly dubious of the claim that the average payday loan is rolled over 7 times, though, given that the report does explicitly state that the average number of transactions per borrower who takes out more than one payday loan per year is only 9 (and 20% of people who take out payday loans only take out 1 per year, and aren't counted in that group). Second, ZestCash allows partial repayment. This is critical, as requiring full repayment is a major factor in forcing payday loan customers to rollover their loans, incurring additional fees and leading to additional loans. Partial repayment is far more likely to result in a customer who can actually pay off their loan and is not trapped in a cycle of debt. But they also require a minimum of a two month term, and I can't find any indication on the site that they let you pay off the loan early to avoid additional interest accrual. Third, ZestCash further increases the chances of repayment by allowing flexibility in both amount and length of the loan. That's what they claim. Hard to state it as fact just yet. And if the chances of repayment are increasing, shouldn't the APR be going down? The justification for such high rates is supposedly that these are such high-risk loans. Anyone approved at ZestCash gets a personal representative who will work with the customer 1-on-1 for the life of the loan A part of what makes me so mad about this site is that they're posturing themselves as a caring, responsible alternative that's going to hold your hand through this process. If you care and are responsible, you're not going to charge such usurious rates. Period.
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dennisgorelik 16y ago
The main reason why society does not like pay day loans, is that there is more harm than good in lending money to people who cannot reliably pay back. If you don't have $500 to repair your car and do not have good credit history -- then probably you would be better off without car, because you won't be able to take proper care of that car anyway. And without payday loan it's harder to get drunk/drugged, so society benefits from not having payday loans. On the other hand it does not make sense to criminalize payday loans, because as gcheong mentioned -- the alternative is broken kneecaps by loansharks. The result: payday loans are neither prohibited, nor supported by government, and are booed by society.
- sneak 16y ago
  Without that car, that person can't get to work. Loans are a valuable service to people all across the wealth spectrum.
mattmaroon 16y ago
It's easy to think payday loan shops are evil until you know someone who owns one. The people running them typically aren't getting rich off of it. A high percentage of loans don't get paid back. Fraud, forgery, and outright armed robbery are a constant threat. Your employees (who have to be willing to work in a place that will be robbed, at gunpoint, on a monthly basis) aren't much more savory than the customers, and theft amongst them is rampant. Shit happens, and a lot of time when it happens to poor people, they have no alternative. It's sad that society is structured in such a way that they are forced to turn to a source of credit that charges them so much, but the payday loans do provide a valuable service.
- jfager 16y ago
  In this particular case, we're talking about an online service, so no unscrupulous employees to get ripped off by or physical dangers to navigate. They also claim to be using advanced models for approving borrowers, and putting in place a bunch of methods to ensure higher payback. All of that implies lower risk, so why aren't the rates themselves significantly lower?
ataggart 16y ago
> ...ZestCash’s own rates, which run between 242% and 462% APR (not a typo)... Yeah, and a 5% APR on a 30 year mortgage would look ridiculously large if you quoted it as an MPR (Millenium Percentage Rate). The only utility of using a standard such as the APR is to compare loans with the same term. Quoting a one week, single payment period loan in terms of an APR leads readers to compare its magnitude with that of other much longer term loans; this is a wholly disingenuous attempt to appeal to emotion over basic mathematical reasoning.
- _delirium 16y ago
  Basic mathematical reasoning actually pushes in the opposite direction: that one should generally prefer to maximize long-run return (or minimize long-run interest payments), so the lengths are only relevant insofar as they change the risk. That does change things, but doesn't make them completely incomparable, and APR is as good a standard measure as any. If you look at most "normal" debt markets, debts of quite different terms compare on reasonably similar APR scales: a 1-month piece of corporate paper and a 30-year government bond all fall within a few percentage points APR spread. It's not like nobody's ever thought of the idea of an APR curve before!
- jfager 16y ago
  Nobody anywhere speaks about MPR, though, and if people did, we'd be used to the typical MPR ranges that a reasonable loan actually falls into. A 462% APR isn't staggering because it's "462" in isolation, it's because it's 462 compared with numbers like 30 (credit card) and 5 (mortgages). ZestCash loans are marketed and scheduled for 2 month to 6 month terms, and that APR percentage includes a 30% origination fee that's about double the typically origination fee of most payday loan companies.
- jtbigwoo 16y ago
  OK, so work the other way. What's the MPR (Monthly Percentage Rate)? If I'm using their lowest rate option and borrowing $250 for 6 months, I get an MPR of about 20% If I count the origination fee of $75, I get just under 25%. In contrast, my moderately high credit card which also lets me take short-term loans charges about 1.5% MPR. Is ZestCash really worth 13 times more? Are they taking on 13 times the risk? You can play with the terms as much as you like. ZestCash is a rip-off compared to any other option.
known 16y ago
In India Micro-finance companies are collecting 52% interest. http://business.rediff.com/slide-show/2010/oct/14/slide-show-1-mfis-come-under-the-lens-as-30-suicides-rock-andhra.htm http://business.rediff.com/slide-show/2010/oct/14/slide-show...
timinman 16y ago
Early in my marriage, when I had a couple kids and 2 student loans to pay, I was having trouble stretching between pay-checks and used payday loans several times. They are a nightmare, because you are stealing from next month and you have nothing to show for the money spent on fees. It's a black hole when you have limited resources. Saying that, banks are as bad or worse with their $20-$30 per transaction 'convenience' overdraft fees, which, if you lose track, can pile up on one and two dollar debit card purchase. I don't know if I'd go so far to say they don't exist, but I do have a lot of sympathy for the borrowers.
known 16y ago
Govt regulate these loans unless they are willing to share the risks & responsibilities.

243 points by jfager 16y ago

GICodeWarrior 16y ago

It is pretty crazy how many media outlets will publish articles written by companies without even fact-checking them.

NathanKP 16y ago
For them it doesn't pay to fact check. In the media business it is all about getting a breaking story out there quickly, and if they waste time fact-checking they are losing readers who are getting the story elsewhere. Clearly this isn't good, but it is the price that we pay for demanding fast, instant news.
- icefox 16y ago
  At the same time it seems like those who would actually fact check would have a story that no one else has.

deleted 16y ago

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twidlit 16y ago

This is what was lost when blogs overwhelmed journalism. Fact-checking, accountability and misaligned curation but I am hopeful blogs will evolve over time to incorporate them back.

mahmud 16y ago
Startup coverage has always been done without the slightest of fact checking. Read your local bigtown paper sometime, and see how bubbly they are about startups, specially local ones.
Cushman 16y ago
They already have. You're reading the fact checking right now. News corporations may be more consistent, but do you really think they're more trustworthy?
- amadiver 16y ago
  Who's watching the watchmen? How do you know that this blog has their facts straight? Have you read any rebuttals to this post? (Already, certain issues that seemed outrageous have been deflated by other commenters.) *For the record, I feel like being "evil" means to prey on human weakness, for which it seems like the site in question and PayDay loans generally fit that bill.
  - Cushman 16y ago
    Who's watching the watchmen? How do you know that this blog has their facts straight? Have you read any rebuttals to this post? I can't answer those questions any better than you already have: (Already, certain issues that seemed outrageous have been deflated by other commenters.)
    - amadiver 16y ago
      I liked this answer enough to upvote it, but my honest question (the parent) has been downvoted. Could someone share some insight why? I switched from Reddit to HN because I thought this community was less prone to stuff like that, but maybe I'm being too sensitive?

andrewljohnson 16y ago

I hate to see entrepreneurs acting like predators. I like to think we are in it for noble reasons - advancement of humanity, crucial innovation - you know, changing the world. But cold hard cash rules for many. It makes a certain kind of sense that a guy who left Google for BMG would be capable of such a scummy company.

gcheong 16y ago
Easy to say it's predatory but I'm not convinced. These are high risk loans so who's to say that the interest rates and fees charged aren't reflective of that risk? On the other hand I am willing to entertain the idea that if the people who most often used these places don't have access to these loans at all maybe they would be better off.
- andrewljohnson 16y ago
  Who's to say crack isn't fun for some people? You're still a criminal and a drag on society if you sell it. It's not that I don't think the rates reflect the risk... it's that I think these rich bastards are saddling poor people with loans, and they expect a good portion of them to drown in the loans. They charge these rates so they can recover vast losses... in the end, the honest people get screwed and even the dishonest borrowers get buried in a tar pit of debt.
  - gcheong 16y ago
    Your analogy with drug dealing is quite apt. Because what happens when people can't get what they want through legal channels? Black market. Loansharking. Broken kneecaps. Payday loans may seem to reflect the worst of our society but in actuality they are a step up from other alternatives.
    - tptacek 16y ago
      Your argument is that loansharking would be just as prevalent as payday loans, once payday loans are outlawed? You can get a payday loan within walking distance of most every block in the city of Chicago. You can't even legally be a loan shark.

mahmud 16y ago

Even VentureBeat did a positive "review": http://venturebeat.com/2010/10/12/douglas-merrill-zestcash/ http://venturebeat.com/2010/10/12/douglas-merrill-zestcash/

tlb 16y ago

I gather that the default rate for payday loans is several percent per month, so you'd lose money charging 30% APR (2.2% / month). Can anyone point to a good article on how the industry works and who their customers are?

bryanh 16y ago
I don't have a link, but Planet Money did a great podcast on payday loans.
gatsby 16y ago
Here are a few articles I've read that you might find interesting. The first is NPR's brief look into the payday loan business as a whole and the second demonstrates the wild rate at which these loans are being issued (£1.2 billion issued in 2009 and estimates of £3.5 billion by 2014). http://www.npr.org/templates/story/story.php?storyId=127220540&ps=rs http://www.npr.org/templates/story/story.php?storyId=1272205... http://www.google.com/hostednews/ukpress/article/ALeqM5h5YQzdFD_fFbk8hxhJYGlOaTb1ig?docId=N0234131286895626812A http://www.google.com/hostednews/ukpress/article/ALeqM5h5YQz...

patio11 16y ago

I'm really sorry that Prosper didn't prosper, because I thought that P2P lending would be an excellent alternative to payday loans. It made huge sense to me that if one person in a community has money and one person in a community needs money, then if they trust each other, one guy pays a modest APR and everyone walks away happy. As it turns out, Prosper couldn't beat the payday loan companies because the people who need payday loans are atrocious credit risks and they collectively relieved us lenders of hundreds of millions (cough, not a typo) before we wised up about this.

patio11 16y ago
Incidentally, if someone wants to brave formidable regulatory barriers, beat Paypalian levels of fraud, and spend their days dealing with the problems of the underclass, this is a multibillion dollar opportunity and you'd create more wealth for the poor than anyone since Walton.
- scottkrager 16y ago
  Lending Club? (I've invested in both Prosper and Lending Club)
megablast 16y ago
The problem is with payday loans, that one party can not really be trusted. This is one of the reason the rates are so high, so many people default. People who can not manage their money are not the best of people to lend to.
- dionidium 16y ago
  People who can not manage their money... I realize that this is sort of a personal nitpick and that it does nothing to invalidate your central claim, but when you make minimum wage and your car breaks down there's not really any money to manage. The thing about living paycheck to paycheck is that unexpected expenses are insuperable (by definition).
  - 16y ago

deleted 16y ago

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klync 16y ago

Haters gonna hate, bro! I'm sure there's a reasonable explanation as to why TechCrunch and other industry insiders are swooning over their newest darling startup. I'm sure it has nothing to do with who's in the in crowd and who's not. After all, silicon valley, and the tech industry as a whole, is a pure meritocracy!

olegkikin 16y ago

They offer $500 for 6 months with $33.5 weekly payments. So you will end up paying 33.5 * 52 / 2 = $871 ($145.16 per month). Isn't it cheaper to get something like this on Prosper or Lendingtree?

jakewalker 16y ago
The people who get these will never qualify for a loan on Prosper or Lending Tree due to low credit ratings, etc.

ashleyw 16y ago

APR is pretty irrelevant for payday loans. If my math is correct, even at the highest quoted 462% APR, a £100 loan for 10-days would have a fee of ~£5. Compared to ~£16 for the rest of the payday industry, that's not too bad. In reality they're an awful source of funds if you've got other options, but that's the point, they're for people who can't get a traditional loan, and whom are most likely high-risk.

tptacek 16y ago
It's not that simple. For people with no income, there is no ethical way to price a loan; the loan is going to blow up. Meanwhile, for people who do have incomes, there usually are better options than payday loans (credit union loans being an example). The problem is that they don't offer the convenience that a payday loan does; you can't walk into a credit union on a Thursday night at 11PM and get a loan.
mynameishere 16y ago
Even 1 day paper uses annual rates. http://www.federalreserve.gov/releases/cp/ http://www.federalreserve.gov/releases/cp/ When your cost of money is 30000 basis points, it just means that you're shifting default risk from the landlord/doctor/drug dealer to a speculator, aka "loanshark". That's why it's not so predatory as it seems. Would you rather people shaft the dentist or some asshole?
- mdda 16y ago
  I work in the (junk) bond markets. There's a clear distinction between Yield-to-Call paper (which is priced so that different bonds are priced based on the yields they offer) and paper that trades on a 'price basis' (i.e. recovery rates in default are a very major consideration). For the 'price based' bonds, the APR (or IRR) is a nonsense measure : because it is only considering the best outcome (payback at maturity). Most people don't understand that the high IRRs exist partly because people are bundling the price-effect of the downside case into the single 'yield' number of the best case. I don't want to defend payday loans really - just point out that Treasury Bonds and (say) Lehman bonds are two very different animals.
16y ago

abthomson 16y ago

It's not clear why the author decided to compare a ZestCash loan with credit cart debt when they're clearly different products. And while ZestCash's rates of 242% to 462% are high, they are, under certain circumstances, competitive. For example, in Washington state, MoneyMart charges in the 300s. Source:http://www.moneymart.com/MM/_includes/templates/StateRates.asp?pdf=WA_CTP&state=Washington&st=Money+Mart http://www.moneymart.com/MM/_includes/templates/StateRates.a...

jfager 16y ago
The point about credit cards was made because it's advice given to middle class consumers. I assume if 30% is too high for people with money, it's even more so for people without. From the perspective of the business making the loans, of course they're different models. I don't see that as the most important perspective, though. And the fact that ZestCash is competitive with other usurious lending companies really does nothing to improve my opinion of them.

vaksel 16y ago

i know we are not supposed to judge a book by it's cover, but man does the ZestCash CEO look like a snake oil salesman: http://gigaom.com/2010/10/12/zestcash-judges-creditworthiness-with-data-analysis/ http://gigaom.com/2010/10/12/zestcash-judges-creditworthines... also you know it's a scam, when the site's page rank, alexa rank and compete rank are set to private.

wilschroter 16y ago
I know Doug Merrill personally and he's one the smartest, most forthright guys you'll ever meet. You're dead wrong to judge him otherwise on his picture or anything else.
- danielnicollet 16y ago
  his alexa rank is not "set to private". what are you talking about??? http://www.alexa.com/siteinfo/zestcash.com# http://www.alexa.com/siteinfo/zestcash.com# didn't check the rest.
  - vaksel 16y ago
    I use a special plugin that tells me all those numbers automaticlaly...maybe it considers an alexa rank of 4,343,216 too high to fit in the space. but that number is horrendous...it's like 10 hits a month
    - phpnode 16y ago
      If it's a new site, what the hell do you expect? No wonder there's no pagerank or alexa rank yet, it's too early.
- lisper 16y ago
  I have also had personal dealings with Douglas Merrill, and I found him to be a thoroughly dishonorable person.
- vaksel 16y ago

lionhearted 16y ago

> The Center for Responsible Lending, which is frequently mentioned on ZestCash’s website at the time of this writing, supports a 36% annual interest rate cap. I used to think this way until I met a guy who was doing research into opening a payday loan shop. Taking a bit of risk and being blunt, I said to him, "Hey dude, you know, I like finance. I get finance, it's good. I'm not a person who just bashes finance because I'm ignorant... but c'mon, aren't payday loans, like, totally fucking evil?" He took it in a good spirit and answered. Here's his take: The first thing he said is that payday loan shops don't charge a huge APR, they charge a flat fee for getting a payday loan, often $20 or $40 on a $500 loan. That's 5% to 10% of the loan amount, however, if you average that to APR you get a crazy %, something in the low thousands, like 1000% or so. So I said, "Well, dude, yeah, 1000% is evil. Right?" He says, and I'll never forget this, "What do you think the default rate is on a payday loan?" I said, "Well, jeez, I dunno..." He said, "Okay. It's really high. Many of them don't get paid back. And it's a shitty business to be in, nobody likes selling payday loans. The price of a payday loan is what it is considering the default rate and the unenjoyableness of the business. If someone found a better system or enjoyed it, they could get in with lower rates. Traditionally banks don't want anything to do with it, since it's such a high risk and unpleasant business." I said, "But... isn't that taking advantage of people?" I won't forget his second quote either - "People only go get a payday loan when, for whatever reason, they can't get money anywhere else. If payday loan places didn't exist, there'd be no emergency credit for people. Mind you, these are the worst borrowers. These are people with no savings who no one trusts enough to lend them 500 bucks for two weeks. Do people abuse it to go drinking a week early? Yeah, sure, like anything else. People abuse eating fast food, drinking too much, tobacco, all sorts of things. I don't approve of that. But for other people, a payday loan is a lifeline. If you regulate it so you can only charge $5 for a $500 loan, there won't be payday loan shops any more. They won't exist. And that'll be bad for people who desperately need credit and can't get it elsewhere. The people that complain about this aren't doing anything to help people, they're not opening a shop to compete with more fair rates, because they'd go out of business. They just like to talk about how unfair it is, but haven't thought about what to do after they drive all these shops out of business with their regulation." He explained some valid reasons for people to get a payday loan - car breaks down and they need to replace it, emergency expenses... he said under those conditions, it can make sense to get a payday loan. And with the huge default rates, the payday shops need to charge a large amount to stay in business. Later he went on to say that people really like making money by lending, so if they thought they could beat a CD or bond rate by lending for low amounts at payday shops, they would. The reason it doesn't happen is because of the default rate and how unpleasant the business is. (No prestige, in fact it's anti-prestigious, and not fun working conditions either) Changed my view on the industry. Still don't like the business, would never go near it personally. But it puts it into context some.

CoryOndrejka 16y ago

From details on ZestCash's website, there are four fairly substantial ways in which they are different than payday loans, which the original author seemed to dismiss. First, ZestCash is charging a substantially lower APR than payday loan shops (280% versus 480%). Second, ZestCash allows partial repayment. This is critical, as requiring full repayment is a major factor in forcing payday loan customers to rollover their loans, incurring additional fees and leading to additional loans. Partial repayment is far more likely to result in a customer who can actually pay off their loan and is not trapped in a cycle of debt. Third, ZestCash further increases the chances of repayment by allowing flexibility in both amount and length of the loan. Fourth, as the Center for Responsible lending points out, most payday loan employees are minimum wage and not trained to help customers in any way. Anyone approved at ZestCash gets a personal representative who will work with the customer 1-on-1 for the life of the loan. Time will tell whether the ZestCash team is able to generate positive change for the underbanked -- full disclosure, I've worked with Douglas and think he's very sharp -- but I certainly think their story is a lot more balanced than the original article would suggest.

jfager 16y ago
I do dismiss those. First, ZestCash is charging a substantially lower APR than payday loan shops (280% versus 480%). You're cherry picking one of their lowest rates and putting it against the assumption that someone's going to roll a payday loan 7 times. If you actually click through and read the CRL report they're quoting, you'll notice that they're misusing the statistics. ZestCash claims that the CRL reports that 80% of payday loans are rollovers, but when you click on that link, the CRL page you're taken to doesn't give that statistic anywhere. I've only skimmed the full report, but I haven't been able to find where they're getting that number from. I'm left highly dubious of the claim that the average payday loan is rolled over 7 times, though, given that the report does explicitly state that the average number of transactions per borrower who takes out more than one payday loan per year is only 9 (and 20% of people who take out payday loans only take out 1 per year, and aren't counted in that group). Second, ZestCash allows partial repayment. This is critical, as requiring full repayment is a major factor in forcing payday loan customers to rollover their loans, incurring additional fees and leading to additional loans. Partial repayment is far more likely to result in a customer who can actually pay off their loan and is not trapped in a cycle of debt. But they also require a minimum of a two month term, and I can't find any indication on the site that they let you pay off the loan early to avoid additional interest accrual. Third, ZestCash further increases the chances of repayment by allowing flexibility in both amount and length of the loan. That's what they claim. Hard to state it as fact just yet. And if the chances of repayment are increasing, shouldn't the APR be going down? The justification for such high rates is supposedly that these are such high-risk loans. Anyone approved at ZestCash gets a personal representative who will work with the customer 1-on-1 for the life of the loan A part of what makes me so mad about this site is that they're posturing themselves as a caring, responsible alternative that's going to hold your hand through this process. If you care and are responsible, you're not going to charge such usurious rates. Period.

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dennisgorelik 16y ago

The main reason why society does not like pay day loans, is that there is more harm than good in lending money to people who cannot reliably pay back. If you don't have $500 to repair your car and do not have good credit history -- then probably you would be better off without car, because you won't be able to take proper care of that car anyway. And without payday loan it's harder to get drunk/drugged, so society benefits from not having payday loans. On the other hand it does not make sense to criminalize payday loans, because as gcheong mentioned -- the alternative is broken kneecaps by loansharks. The result: payday loans are neither prohibited, nor supported by government, and are booed by society.

sneak 16y ago
Without that car, that person can't get to work. Loans are a valuable service to people all across the wealth spectrum.

mattmaroon 16y ago

It's easy to think payday loan shops are evil until you know someone who owns one. The people running them typically aren't getting rich off of it. A high percentage of loans don't get paid back. Fraud, forgery, and outright armed robbery are a constant threat. Your employees (who have to be willing to work in a place that will be robbed, at gunpoint, on a monthly basis) aren't much more savory than the customers, and theft amongst them is rampant. Shit happens, and a lot of time when it happens to poor people, they have no alternative. It's sad that society is structured in such a way that they are forced to turn to a source of credit that charges them so much, but the payday loans do provide a valuable service.

jfager 16y ago
In this particular case, we're talking about an online service, so no unscrupulous employees to get ripped off by or physical dangers to navigate. They also claim to be using advanced models for approving borrowers, and putting in place a bunch of methods to ensure higher payback. All of that implies lower risk, so why aren't the rates themselves significantly lower?

ataggart 16y ago

> ...ZestCash’s own rates, which run between 242% and 462% APR (not a typo)... Yeah, and a 5% APR on a 30 year mortgage would look ridiculously large if you quoted it as an MPR (Millenium Percentage Rate). The only utility of using a standard such as the APR is to compare loans with the same term. Quoting a one week, single payment period loan in terms of an APR leads readers to compare its magnitude with that of other much longer term loans; this is a wholly disingenuous attempt to appeal to emotion over basic mathematical reasoning.

_delirium 16y ago
Basic mathematical reasoning actually pushes in the opposite direction: that one should generally prefer to maximize long-run return (or minimize long-run interest payments), so the lengths are only relevant insofar as they change the risk. That does change things, but doesn't make them completely incomparable, and APR is as good a standard measure as any. If you look at most "normal" debt markets, debts of quite different terms compare on reasonably similar APR scales: a 1-month piece of corporate paper and a 30-year government bond all fall within a few percentage points APR spread. It's not like nobody's ever thought of the idea of an APR curve before!
jfager 16y ago
Nobody anywhere speaks about MPR, though, and if people did, we'd be used to the typical MPR ranges that a reasonable loan actually falls into. A 462% APR isn't staggering because it's "462" in isolation, it's because it's 462 compared with numbers like 30 (credit card) and 5 (mortgages). ZestCash loans are marketed and scheduled for 2 month to 6 month terms, and that APR percentage includes a 30% origination fee that's about double the typically origination fee of most payday loan companies.
jtbigwoo 16y ago
OK, so work the other way. What's the MPR (Monthly Percentage Rate)? If I'm using their lowest rate option and borrowing $250 for 6 months, I get an MPR of about 20% If I count the origination fee of $75, I get just under 25%. In contrast, my moderately high credit card which also lets me take short-term loans charges about 1.5% MPR. Is ZestCash really worth 13 times more? Are they taking on 13 times the risk? You can play with the terms as much as you like. ZestCash is a rip-off compared to any other option.

known 16y ago

In India Micro-finance companies are collecting 52% interest. http://business.rediff.com/slide-show/2010/oct/14/slide-show-1-mfis-come-under-the-lens-as-30-suicides-rock-andhra.htm http://business.rediff.com/slide-show/2010/oct/14/slide-show...

timinman 16y ago

Early in my marriage, when I had a couple kids and 2 student loans to pay, I was having trouble stretching between pay-checks and used payday loans several times. They are a nightmare, because you are stealing from next month and you have nothing to show for the money spent on fees. It's a black hole when you have limited resources. Saying that, banks are as bad or worse with their $20-$30 per transaction 'convenience' overdraft fees, which, if you lose track, can pile up on one and two dollar debit card purchase. I don't know if I'd go so far to say they don't exist, but I do have a lot of sympathy for the borrowers.

known 16y ago

Govt regulate these loans unless they are willing to share the risks & responsibilities.