Credit providers traditionally seek out good credit risks—people with a strong track record of paying back loans and sufficient income to maintain that habit. But a relatively strong economy means that people with good credit already have it, so in their efforts to grow, lenders and their retail partners are pursuing the market of consumers with poor credit. With an innovative form of layaway and sophisticated predictive algorithms, these companies give people with bad credit access to funding and desirable products, in ways that they claim avoid the predatory practices that historically have marred other attempts to reach these consumers.
The lending companies, with names such as Zebit and Affirm, grant consumers retail credits that they can use to make purchases of product available through retailers such as Walmart, Urban Outfitters, and thousands of others. The consumers receive the products immediately, and the retailer receives the full payment for the product purchased. Thus the lenders take on all the risk of nonpayment, charging considerable interest to the buyers to do so. For example, to obtain an Apple Watch through Zebit (which calls itself the “Amazon for the under-served”), a consumer would pay $549 over time, far more than the $399 retail price.
Notably though, the companies claim that they make these excess costs clear and obvious to buyers. They explicitly acknowledge that their prices are higher than are available elsewhere. In addition, they list the amount of interest that borrowers will pay in dollar amounts, rather than percentage terms, to help them understand the financial commitment they are making. Such efforts set the current lenders apart from conventional rent-to-own lenders, which have long been criticized for their predatory and unethical practices, designed to trick and lock consumers into unaffordable, expensive contracts.
The lenders also claim that their analytics enable them to predict with more accuracy which consumers are more or less likely to pay them back. To establish these predictions, they require borrowers to provide extensive personal information. Accordingly, Zebit’s default rate is about 15 percent, far lower than that for conventional subprime loans.
Discussion Questions:
- Why are some lenders and their retail partners targeting shoppers with lousy credit?
Source: Lisa Fickenscher, New York Post, March 10, 2019