|"Pay Off Later", of course!|
We met at our storefront office in Woonsocket, RI and then split up into two-person teams. We assigned each team to a predatory lender--payday lender, pawn shop, or rent-to-own store--and then sent them out to pose as customers and learn how they do business. Laura, our Connecticut Programs Coordinator, and I posed as a brother and sister making $1,500 per month and looking to purchase the biggest TV possible. To do that, we went to Aaron's Rent-to-Own, a publicly traded firm that sells TVs, furniture, appliances, and other electronics. Our goal was to pay attention to signage, the layout of the store, the nature of our interactions with their employees, and how they pitched their products.
Can't Afford It? No Problem!For those of you who don't know, here's the rather brilliant rent-to-own business model: you are looking to purchase a TV for your new apartment, but can't afford the up-front cost. Because of your poor credit and low income, you lack the means to finance the purchase. "No problem!" says the friendly employee at Aaron's. "You can purchase a $2,400 60'' TV for the low price of $149 a month! No credit check or bank account required. Your income doesn't matter! We just need proof of identity and the names of a few references and you can walk out of here with your new toy!"
Sounds good, doesn't it? Well, let me add one key detail: you actually make 24 payments of $149 (plus about $30 of taxes and other fees), for a total of $4,296. So yea, your $2,400 TV just ended up nearly costing double. Remember, they'd make money even if you just flat-out bought the TV for $2,400, so by the time you finish your installment plan they are swimming in the money. Of course, you won't be surprised to hear that they have trouble collecting on about 25% of their accounts. No matter, though! You can simply give back the TV and they'll happily pick it up--for free!--and re-sell it to the next person who can't afford it. And if that doesn't work they'll sue your ass!
When Laura and I were in the shop we did everything we could to highlight how little money we make, how terrible our credit is, and how unlikely we are to afford $149 a month. What amazed us was that the salesperson didn't seem to care. It occurred to me that the employees probably think of themselves as salespeople, not financiers, and I doubt they are trained to think like a lender. I'm pretty sure this isn't accidental: these stores make money on the payment plan, and the last thing they want is for the salespeople worrying about a customer's ability to pay!
One of the conclusions to which we came as a group is that it's really, really hard to compete with predatory lenders. Our business models are diametrically opposed: they make money, paradoxically, by lending to those who are unable to afford the loan. In contrast, our goal is to empower the borrower--not make money off them--and we therefore are fundamentally concerned about their ability to pay, as well as whether they truly need the loan. In fact, we consider it a victory if we can help a client altogether avoid the loan. What's more, we will never have cozy storefronts on every street corner chock full of fancy electronics and replete with "no credit needed" and "instant approval" signs.
Timing Is KeyIt's clear that we need to pick our battles and focus on those areas in which we can have the most impact. A great example is our loan to cover the cost of placing a security deposit on an apartment. To make these loans we partner with homeless shelters, domestic violence agencies, and other nonprofits. The key is to make sure that the applicant is aware of our products and services at the right time. In other words, if you see a commercial for a Toyota Camry the day after you purchased a Nissan Maxima, you are almost certainly not going to go buy the Camry. But if you see that commercial just after your Maxima's transmission broke, you might go and check out the Camry.
In the same way, it's crucial that we get to our borrowers at the point of application. This is especially hard, given that their friendly predatory lender is right down the street, and with our small marketing budget it's unlikely that they've heard of us. Fortunately, through new partnerships with high-quality nonprofits, word-of-mouth, grassroots outreach, and targeted advertising (such as Facebook ads), we can start to steer more people our way and out of the belly of the beast.
My biggest takeaways from the staff date were that rent-to-own stores are far more pernicious than I had previously understood and that we have to really focus on what type of customer we want to reach, and when. Payday lenders charge 261%, but at least they only do loans of up to $450. With rent-to-own stores, the sky is nearly the limit in terms of how much you can borrow. Even worse, they don't technically charge interest. You won't see any APR numbers listed in their stores, despite the fact that the "effective APR" is over 60%.
What to Do from Here?I'll leave you with this question, which we've yet to resolve. Should we do a lot of outreach to try to get people to finance a TV purchase through us instead of through Aaron's? Should we focus on emergency loans that serve as an alternative to payday loans? Given our limited marketing resources, how would you deploy them and which product(s) and population(s) would you target?
Check out more of our blog posts on predatory lending:Sharks in the Water: The Wild West of Online Payday Lending
Payday Loans Are Fatally Flawed
Payday Lenders Want Your Business!
Girding For A Fight
Predatory Lending - Brazil and the UK