We recently calculated that by lowering interest rates for people who have a track record of repaying loans on time, LendUp saved its California borrowers over $9 million in 2015 (compared to what they’d have paid if they borrowed from some of the nation’s largest payday lenders). Savings for our borrowers nationwide last year topped $16 million — and we’re pleased to announce we’ve surpassed that this year. In fact, as of June 1, we calculate that we've already saved our customers a staggering $18.3 million in 2016.
So how do we do it? We start by providing access to credit for people who look risky because they have low credit scores or thin credit files. As customers repay their loans or take our free financial education courses, they demonstrate that they’re less likely to default on future loans. This reduced default risk allows us to meaningfully reduce interest rates as our customers continue to climb the LendUp Ladder.
We do this because we want to provide a path out of payday loans, where lenders rarely consider the payment history of repeat customers. According to the Center for Responsible Lending, "Payday lenders typically charge the maximum possible rate allowed in a state." What’s more, a payday borrower could repay countless payday loans without ever seeing a rate reduction.
LendUp's approach aligns with the Center for Financial Services Innovation (CFSI) and one of its core Compass Principles, which encourages short-term credit lenders to "create opportunities for upward mobility and financial health by allowing borrowers to turn on-time payments into better credit opportunities."
Reducing borrowing rates while simultaneously increasing loan amounts means that when compared to payday lenders, LendUp customers can save hundreds of dollars a year in interest and fees.
For example, a real customer from Texas we’ll call Kelly, who joined the LendUp community in early 2015, exhibited borrowing habits similar to what the CFSI calls a “misaligned cashflow borrower” (described by the CFSI as those who "tend to access small dollar credit amounts frequently to pay bills when income and expenses are mistimed ... 42% take out 6 or more loans per year, and 16% take out more than 12 loans per year").
In early 2015, Kelly was relying on single-payment loans every month, but because of her positive payment history with us, she quickly climbed the LendUp Ladder and gained access to larger loan amounts, installment loans and far lower interest rates. Today, Kelly is no longer taking month-long loans loans and has access to rates below 30%. Further, by our calculations, she’s saved thousands of dollars versus what she would’ve paid taking similar installment loans from payday lenders in Texas. And Kelly’s story is common among LendUp customers.
We’re excited about saving our customers so much money — $18.3 million! — this year already. This explosive growth in savings is proof that the LendUp Ladder is working, but this is just the beginning. The Ladder is still young; LendUp has only been doing business in our home state of California for about four years, and for only a year or two in most other states.
Now that we're becoming established in different parts of the country, more and more of our early customers are reaching the Prime rung of the Ladder where those levels are available, meaning that they have access to installment loans with interest rates as low as 29% (for comparison, installment loan rates offered by payday lenders are typically well into the triple digits).
Between January and May of 2016, we issued six times as many Prime-level loans as we did during the same period in 2015. And Platinum, the Ladder level directly below Prime (which also boasts rates well below those offered by payday lenders), saw huge growth as well — 180% over the same period in 2016.
Taken together, it’s easy to see how the savings are piling up for our customers.
We couldn’t be happier with our customers’ progress on the LendUp Ladder, which collectively saves them millions of dollars a year versus payday lenders — and we can't wait to watch those savings continue to grow.
Measuring how much money we saved customers wasn’t easy, mainly because it’s difficult to compare our products to other products our customers can access. To calculate savings, we pulled the listed interest rates from the websites of eight of the largest payday lenders across the country to understand the fees they charge on both traditional payday loans and larger, longer-term installment loans in each state where they operate. In each instance, the lowest listed APR for payday lenders was used to ensure the most conservative view on cost savings, and then these individual rates were averaged to come up with a single industry average. Rates varied widely from state to state based on state regulations.
Disclaimer: LendUp is not providing financial, legal or tax advice. If you need or want such advice, please consult a qualified advisor.