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>What does that have to do with fraud? Who is the fraud? What does interest rate have with fraud? Well, for each 1000$ loaned out, say, $100 will be defaulted
by nopriorarrests 8y ago
>What does that have to do with fraud? Who is the fraud?
What does interest rate have with fraud? Well, for each 1000$ loaned out, say, $100 will be defaulted by some honest dude who had no money to pay back in time, and $100 will be loaned to someone who had no intention to pay it back. Numbers are random of course, but they give the idea.
To keep your business operating, you have to charge enough interest to compensate both for $100 honest default and $100 loaned to fraudster.
- stevesimmons 8y agoPlus, in order to get those 20% loss rates, you have to decline 80% of people, and half the 20% accepted will decide the rates are too expensive. So only 10% of applicants end up taking a loan. Then a $10 per application marketing/processing cost and $5 per application decisioning cost translates to $150 cost per loan booked. Using the numbers above, it would cost $350 to lend $1000. That's 35%. If the loan term is 2 months, the APR is annualized by compounding that 35% 6 times, giving 500%. If the loan is amortizing, the APR calculation comes out a lot higher, probably more like 1000%. This is the fundamental economics of high-cost, short-term credit (HCSTC). It is UK, where I am, HCSTC is highly regulated by the FCA. The nominal interest APRs are less important that a regulatory rate cap: customers cannot be charged more than 100% total interest and fees for loans up to 12 months.
- nopriorarrests 8y ago>This is the fundamental economics of high-cost, short-term credit. Exactly. People see 300% APR and think about it like it's applied to their premium credit card, the financial product they are familiar most, and get into rage without trying to run the numbers first.