Beware Fintech Making High-Interest Debt Easier Than Ever

Fintech (financial technology) is supposed to make our lives better. You’ll hear how they want to nudge us to save more, invest better, spread risk, and lower costs. But if you look a little deeper, another thing many want to make easier is debt.

Fintech doesn’t make you financially literate. Did you know that banks still make $35 billion a year in overdraft fees? Consider the recent findings of a TIAA Institute study Millennial Financial Literacy and Fin-tech Use reported by Felix Salmon:

One might view fin-tech as a tool that provides convenience, but one that also has the potential to improve personal finance decisions and behavior. It could then promote better personal finance outcomes. But the dynamic is more complex and nuanced, especially when viewed at the level of separate fin-tech activities.

• Millennials are 40% more likely to overdraw their checking accounts if they use mobile payments.
• Budgeting tools don’t help either. Millennials who use their mobile devices to track their spending are 25% more likely to overdraw their checking account.

Everyone wants to lend you money, from Goldman Sachs to the mall kiosk cashier. Goldman Sachs started a new high-yield savings account and renamed it Marcus. Many people found it prestigious to “have an account” at Goldman Sachs. But really, that savings account only exists so that Marcus has a cheap source of funds to offer personal loans online at up to 25% APR. A Marcus smartphone app is coming soon. SoFi and every other popular student-loan refinance company is expanding to consumer loans as well. Micro-loan companies like Affirm will let you put a $100 pair of jeans on a monthly payment plan.

Here’s the growth of personal loans since 2010, per Quartz:

Got bad or no credit? Fintech to the rescue! LendUp, Elevate, and others already provide payday-type loans with 100%+ APRs. Except they aren’t “payday” loans, they are structured as “installment” loans. Instead of just $300, they’ll lend you more money because they lets them escape the payday loan regulations. See the LA Times article Borrow $5,000, repay $42,000 — How super high-interest loans have boomed in California:

They may be new start-ups, but they can still exhibit old-fashioned bad behavior, like promising to help customers build credit but never actually reporting anything to the credit agencies. CFPB Orders LendUp to Pay $3.63 Million for Failing to Deliver Promised Benefits:

“LendUp pitched itself as a consumer-friendly, tech-savvy alternative to traditional payday loans, but it did not pay enough attention to the consumer financial laws,” said CFPB Director Richard Cordray. “The CFPB supports innovation in the fintech space, but start-ups are just like established companies in that they must treat consumers fairly and comply with the law.”

Margin loan for your next iPhone? Right after writing about buying productive assets instead of going into debt, I get this email from Ally Invest:

Margin is something that short-term traders use in order to increase their buying power temporarily. Long-term investors have little to no use for margin since the interest rates will eat up returns. But at least they’d be buying a productive asset if they bought stocks.

Here’s why using margin loans to buy a car or smartphone is a bad idea. First, your interest rate at Ally Invest starts at 9.50% APR and isn’t fixed. So it’s not like you’re getting some awesome rate. 10%-15% APR is as high as credit card interest. Second, this is a collateralized loan backed by your stock holdings. If you don’t pay it back, you don’t just get a ding on your credit score like with a credit card. They sell your stocks and take the money. A home-equity loan is backed by your house, but at least your interest rates are low. Even worse, if the market value of your portfolio drops enough (something not under your control), your broker will issue a margin call. If you don’t pay up immediately, they will forcibly sell your stocks at that low price to pay off your loan.

Bottom line. Fintech may be new, but some things never change. There will always be people selling you things you don’t absolutely need, and now it will be easier than ever to go into debt to buy those things. Be on the lookout for wolves dressed in slick smartphone apps.