Online lenders seek customers in need; advocates warn of risks

The black-and-white commercial follows a sweaty Sylvester Stallone on his iconic training run through Philadelphia as Rocky, America’s favorite underdog.

“Every day is a fight to beat the odds, to get ahead of what life throws at you,” intones a deep-voiced announcer as the “Rocky” theme music plays and Stallone jabs the air with his fist. “Now there’s a new way to borrow the money you need fast — without having to use a payday loan.”

It’s an ad for a Rise online installment loan — marketed as a kinder, gentler alternative to payday loans. It can come at a discounted interest rate for someone with the right online profile and payment history.

Consumer advocates say borrowers shouldn’t necessarily buy the hype, warning that an unaffordable installment loan is just as dangerous as any other short-term loan. But the company’s top executive says the loans aim to help people with limited or subprime credit histories.

“We licensed the soundtrack of ‘Rocky’ because we’re trying to highlight the idea of a financial comeback for our customers,” said Ken Rees, CEO of Elevate, the Fort Worth, Texas-based company that launched Rise loans a year and a half ago.

Now available in 15 states — including Missouri — the company’s online loans represent almost half a billion dollars in credit extended by Elevate to more than 168,000 customers. The company expects to expand its services to Kansas and Virginia later this year.

Such small-dollar installment loans are growing in popularity — especially online, where Elevate and other companies pioneer the use of big data and analytics to offer borrowers flexible payment schedules or lower rates that reward them for paying on time.

The firms are looking to elbow out brick-and-mortar payday lenders, who have seen loan volumes drop in recent years as states tightened laws intended to restrict or ban payday storefronts.

Borrowers have longer to repay Rise installment loans, which typically range from $500 to $5,000. But they can still be very costly.

A $1,000 Rise loan in Missouri, for example, could wind up costing more than $3,100 to repay in 24 biweekly installments of $132.56, according to a standard payment schedule posted on the company website. That’s an annual interest rate of 324 percent.

The interest rate for a typical payday loan is about 400 percent, according to the Consumer Financial Protection Bureau, a federal watchdog agency. Annual interest rates on credit cards run from about 12 percent to 30 percent.

Consumer advocates warn that installment loans aren’t necessarily safer than payday loans. And they caution borrowing money online carries extra risks because it can entail giving the lender direct access to personal bank accounts.

“A triple-digit loan is still a triple-digit loan,” said Lauren Saunders, associate director of the National Consumer Law Center, a nonprofit advocacy group. “Even if it’s slightly cheaper than a traditional payday loan, it’s still unaffordable.”

In a study last year, the center evaluated Rise and six other loan products that used big-data underwriting and portrayed themselves as alternatives to payday lending. The study found that some of the loans’ features were “arguably ‘less bad’ than those offered by traditional payday lenders” but the products still failed to qualify as “genuine, better alternatives.”

Consumerist, a blog published by a nonprofit subsidiary of Consumer Reports, more bluntly described Rise loans as a “payday wolf in Rocky’s sweatshirt.”

Getting a loan on the Internet might be more convenient than a trip to a store. But borrowers should be careful about giving online lenders direct access to their bank accounts, said Ed Mierzwinski, consumer program director for U.S. PIRG, an advocacy group.

Allowing a lender to withdraw payments automatically can lead to exorbitant overdraft fees on top of the already high interest rates, Mierzwinski said.

“Online lenders are worse than storefront lenders because they have their electronic hand in your bank account all the time, and that is a tremendous competitive advantage over you,” he said.

Rees, the Elevate chief, said his company offered credit to borrowers in need of emergency cash who weren’t being served by the mainstream banking system.

He describes customers targeted for Rise loans as the new middle class: They often have middling to poor credit scores and fairly low savings. They skew more female than male, and most have at least some college education, Rees said. More than half are 25 to 44 years old.

The Rise underwriting process fills a need for these customers, Rees said. It takes into account not only traditional credit scores but also third-party data, such as whether a customer has a cellphone account or pays rent and utilities on time. Web browsing history and social media profiles come into play, too.

The lack of a social media account, for example, is considered a red flag.

“If you’re dealing with a customer that doesn’t seem to have any social media footprint, that’s just as concerning as the customer whose date of birth doesn’t match his credit report,” Rees said.

A customer’s website activity also can help determine fraud or credit risk, he said.

“If we see a customer who comes directly to our site and spends 30 seconds filling out an application, that looks a little less thoughtful to us than a customer who spends 20 or 30 minutes (on the site) to make sure the product is really for them,” he said.

If borrowers record successful payment histories over time, they get discounts on their loans, with the goal of getting all customers down to a 36 percent interest rate, Rees said.

As their loan volume increases, Elevate and other online lenders are waiting anxiously for the Consumer Financial Protection Bureau to issue regulations for the payday lending market later this year. They’re concerned the new rules might hinder their operations.

Consumer advocates are urging the bureau to include installment loans under the new rule. They also want the bureau to require documentation of income and expenses as proof of a borrower’s ability to repay, and to separate access to a borrower’s bank account from the repayment of a loan. That prohibition, they say, could guard against electronic payment methods becoming a collection method.

Rees said his company had been working closely with consumer groups, legislators and the consumer bureau to find “common ground” on the regulations.

Elevate spent $210,000 last year to lobby the federal government on financial legislation and online lending issues, according to Senate financial disclosure records.

This story was originally published March 13, 2015 at 7:52 PM.