You have questions -- we have answers!

We aim to be as transparent as possible, so here are some of the most frequently asked questions we've received so far, and please let us know if you have a question that isn't answered here.

 

24% per year is a lot! Why do you think it is OK to charge such high interest? 

You're right. 24% is a high interest rate to charge for a loan, but the unfortunate reality is that making small loans is relatively expensive, and we are an order of magnitude cheaper than the existing alternative (Tennessee car title and payday lenders charge up to 264% per year). We don't think that those who are less able to afford a loan should face rates that make their loan even more difficult to pay, but we also aim to be financially sustainable at scale without perpetually relying on grants and donations.

Lending money has relatively fixed costs that change little as loans get larger in size, and this is part of the reason why conventional financial institutions like banks have shied away from small consumer loans. When we make a small loan, that 24% per year must cover the costs associated with the loan in addition to those fixed costs (like equipment costs, compliance costs, utilities, our one employee's wages). 

If we seek to be financially sustainable, the interest rate on our loans must also cover the money lost on loans that are not repaid. Even one of the best-run community lenders has a repayment rate of about 94-95%, meaning that 5-6% of their loans are not being repaid. We hope to reach repayment rates that are that high.

We would love to charge 4% rather than 24%, but we would lose our money within a year and be no help to anyone. Consider just one of our costs, our single paid employee's yearly wages of $32,040 (approximately the amount earned by a first-year teacher in Grundy County): We would need to disburse more than 1,470 year-long $1,000 loans at 4% and have every loan repaid to cover this cost alone. If even 1% of those loans were not repaid, we would need to disburse 674 more to cover the lost ones. Our one employee, of course, is not our only expense. The realistic costs of disbursing, administering, and servicing that many loans with no additional cost is a non-starter, and we would rather be an existing alternative to car title and payday lenders than a theoretical one.

Lastly, 24% is only the introductory loan rate -- the maximum we will ever charge. Once a borrower has demonstrated that he or she will work with us to repay a loan and progress through the financial coaching sessions, he or she will never receive another loan at 24% per year from us. If they are ever in need of an additional emergency loan, used car loan, or debt consolidation loan (some examples), their loans will be cheaper. As borrowers take loans from us, we hope to help them build their credit score so that they can eventually access more reasonably priced financial services.

A number of finance and banking professionals do not think that we can do this successfully, even at 24% -- we are hoping to prove them wrong. If we find at the end of our pilot that we can do it even more cheaply, we will reduce our rates.


What are the hidden fees? What's the catch?

BetterFi uses no hidden fees alongside its loans. All interest and fees associated with a loan, in total, will never amount to more than 24% per year. We specifically chose a lending license in Tennessee that lumps interest and fees together in terms of dictating what is legally permissible.

The loan documents that we use show the borrower the total amount he or she will borrow, the total amount in interest and fees, the amount they will pay each month and when those payments are due, and also show the total interest and fees as a percentage of the borrower's principal amount. We caution readers of press or news articles regarding us and our loans to be aware that numbers are occasionally rounded up or down in the editing process, and do not always reflect the exact amounts of our real loans.


How much of a borrower's income will go toward paying off their loan?

Ideally we will never require more than 10% of a borrower's income to go toward paying off his or her loan, though circumstances may dictate different scenarios. We work with our borrowers to determine an amount that will strike a balance between shortening the life of the loan while also being a reasonable recurring payment. When we meet with borrowers we go through their existing income, expenses, and debts to determine a path forward that they find agreeable.

Especially if a borrower has been paying a substantial amount per month on a series of predatory loans that possibly will stretch on into the future, we often can create a payment plan that will allow them to reduce their monthly payments while paying off the loan relatively quickly. We see this as a win-win as their payments become less and they pay off the loan quickly, even if it does not meet our ideal of requiring no more than 10% of a borrower's income. 


How can this be a non-profit?

Our first and foremost goal is alleviating poverty by providing more affordable routes out of dependence on predatory loans. Poverty has structural causes that we cannot even hope to begin addressing, but we can at least mitigate some of the impact by limiting the extreme indebtedness caused by predatory lending. In a world with less existing poverty, stricter laws on predatory lending, subsidized consumer finance, or even a universal basic income, perhaps we would not be needed. We hope to work ourselves out of existence.

That being said, in this world, non-profits must still pay the bills. We opted to form a non-profit under 501(c)(3) specifically to avoid having profit-motivated shareholders, and more specifically to avoid having our program's existence be dependent on a bottom line. We still must be financially sustainable, and even non-profits must generate enough money to operate (typically via donations and grants).

If we are able to create a model that can be financially sustainable at scale, then any profit made by BetterFi will go toward that first goal whether by reducing interest rates, increasing the flexibility of loans, increasing our geographic footprint, developing financial literacy programs, or reaching new clients.


So who exactly is making money off of this, anyway?

As a Tennessee non-profit corporation and a non-profit under article 501(c)(3), there are no shareholders collecting dividends or building their equity with BetterFi. The decisions within BetterFi will never be made to maximize profits, but only to maximize our potential impact in terms of alleviating poverty and saving our borrowers' money. 

Our expenses include compliance and registration costs with local and state authorities, paying for internet and phone in our office, supplies, minimal travel, a loan management system, and one paid employee whose wage is set approximately to the starting wage for a first-year teacher in Grundy County. As we file each year's 990, we will publish them on this website for any interested party to see.

We are targeting $1.5 million in loans over the first 5 years. In Tennessee, the average-term car title loan can carry an effective interest and fee rate of 124.3%. Even if all $1.5 million of our future loans were made at 24% (which they won't be), then we would be saving our borrowers more than $1.5 million over their next best alternative. In these cases our borrowers may not be making this money, but they are keeping it.