Council Post: Cash-Strapped Americans Deserve Better
Founder and CEO of Varo Bank, digital banking trailblazer leading the first-ever all-digital national bank.
2023 has been marked by continued financial pressure and uncertainty for everyday Americans. The strain of inflation persists, and people of all income brackets have been forced to make difficult trade-offs.
In this climate, many are looking for affordable loans to help cover monthly expenses.
For generations, those living paycheck-to-paycheck have been neglected by traditional banking systems. As such, they have had to turn to non-bank payday, auto-title or other predatory lenders to cover unexpected costs.
With no other options, these sources of short-term loans were, for many, the only way to manage. In fact, Americans spend over $30 billion annually to borrow small amounts of money from these lenders with many borrowers paying more in fees than they receive in credit over the long term. This needs to change.
Our industry needs to commit to aligning with consumers’ long-term financial goals and creating solutions that offer mobility and promote economic well-being. While short-term borrowing is not a permanent long-term solution, it’s a critical tool many people use to manage everyday expenses. I invite others in the industry to join our company in committing to innovation that breaks down the systemic barriers to financial growth and enables people to make ends meet in the short term and, ultimately, to succeed over the long term.
Here are three guiding principles that can dramatically shift the short-term lending landscape:
1. Customers deserve low, flat fees that are clear and easy to understand.
Not all short-term lenders effectively communicate their fee structures. Flat fee structures that are fully disclosed upfront provide more transparency and the ability to manage the total cost of a loan compared with subscription, tipping or expedite fees for instant access to loans.
2. All short-term lending products should include self-directed repayment plans.
Repayment flexibility allows customers to time paying back the loan to account for expected windfalls and expenses. It’s important to build products that allow customers to borrow money when they need it most and make repayments within a reasonable time period, not on their next payday. This will limit the likelihood of expensive overdraft fees and allow customers to pay back their loans at a time that suits them best.
3. Eliminate profit from the never-ending debt spiral.
Today, too many short-term lending solutions allow customers to continue to borrow, even when they are unable to make repayments, furthering the debt spiral. This practice is prevalent in payday lending, where loan rollovers put hard-working Americans deeper into debt, and it needs to stop.
However, I’m heartened by the number of lenders who are helping to strengthen customers’ financial health by incorporating user-friendly, educational products that reward good borrowing behavior and eliminate bad habits.
By aligning with these principles, our industry can move closer to providing short-term lending products that help people bridge cash flow gaps and build wealth. We must commit to eliminating short-term loans such as payday, auto-title or other predatory loans that preclude wealth creation. To do this, our industry needs to invest in technology and product innovation that drives greater economic mobility.
Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?
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