The Tennessean (Nashville)
By: Walker Moskop
September 27, 2012
Every year, millions of Americans in a pinch turn to short-term loan products, such as payday and auto title loans.
Some fail to meet loan terms -- like having to make a full repayment within two weeks -- and they roll over the loans, which begin to rack up fees.
Each time a loan is extended, the wheels on the cycle of debt whirl faster.
The demand for small-dollar loan products in the U.S. is robust. Last year, an estimated 15 million Americans, two-thirds of whom had no savings, accessed products including payday loans, direct deposit advances, auto title loans and pawn loans, according to the Center for Financial Services Innovation.
And many others are living paycheck to paycheck, one unexpected expense away from deeper trouble.
For the past few years, Mario Avila has been wrestling with how to tap into the potential of this underserved market. Avila, who received his MBA from Vanderbilt University in May, became interested in small-dollar lending while working for a Chicago firm that provided consulting services to nonprofit groups. He began going to micro-lending conferences in 2008.
Four years later, Avila and three partners are preparing to launch the pilot phase of their consumer lending company, Contigo Financial. They hope to take a slice out of the $74 billion payday lending and tax refund loan market by partnering with employers and offering employees lower interest rates with longer windows to repay.
Avila expects no shortage of demand for the loans.
"Take a drive from downtown on Fourth Avenue to Old Hickory," he said. "There are 30 payday lenders." Along that route, there are only two McDonald's and zero Starbucks, he said.
Tennessee has one of the highest concentrations of payday lenders in the U.S., and according to the Federal Deposit Insurance Corporation, 18 percent of the state's population is underbanked -- people who have checking or savings accounts but use alternative financial services.
Avila said Contigo will be competing at the higher-end spectrum of the payday market and will serve borrowers earning between roughly $25,000 and $55,000 a year. Depending on a borrower's expenses, those with lower incomes could still qualify, though some may not meet the standards.
Contigo's model is far different from that of traditional payday lenders, who require that borrowers repay loans that carry annual interest rates around 380 percent within two weeks.
Rather than appealing directly to consumers, Contigo is pitching its model to employers as a way to reduce debt-induced stress that harms worker productivity and that can lead to health problems or absenteeism.
Without charging employers, Contigo will offer collateral-free loans and financial counseling to employees who have bank accounts and have been working for at least six months.
The loans will carry an annual interest rate of 24 percent, plus fees, and the maximum loan amount will be $2,500. The borrower can choose the duration of the repayment period, which can range from 90 days to nine months.
The company estimates the average loan issued will be $1,000, with an interest rate of 36 percent, which includes fees, and a repayment period of six months.
Contigo won't take into account consumers' credit histories, but it will report borrower information to credit bureaus -- which most short-term lenders don't do -- allowing customers to build or improve their credit histories.
"If you don't have credit, you can't do anything," Avila said. "You can't get a car loan. It's really difficult just to get an apartment loan without a co-signer."
Six employers signed up for the pilot phase, which will begin when Contigo receives its lending license from the state. (Avila anticipates this will happen within the next few weeks.)
One of those employers is PatientCredit, a Nashville health care billing company run by David Frederiksen, who also serves as an adviser to Contigo.
"It's incredibly helpful to an employee who is suddenly encountering a significant expense," Frederiksen said, "and secondly, it removes the burden of my playing the role of both employer and creditor, which is something I don't want to do."
Short-term loans multiply
Online short-term lending is a growing industry, and improved technology enables lenders to reduce some of the costs in issuing small-dollar loans, said Kim Manturuk, a researcher at the University of North Carolina Center for Community Capital.
Contigo, which is web-based, has no brick-and-mortar expenses beyond leasing an office on Church Street.
While a small staff and minimal footprint will keep a lid on costs, Contigo will still face the challenge of trying to operate in a stigmatized industry that many consumers, employers and investors know little about.
"We're in a space that typically gets negative connotations for the loans we provide," Avila said.
Contigo has reached out to roughly 50 employers in Davidson and Williamson counties, Avila said, many of which he hopes to get on board if the pilot phase succeeds. The company hopes to go live in January.
The consumers that Contigo plans to target are risky, he said, which is why they've largely been ignored by mainstream lenders.
"It's expensive to get them up the financial ladder," Avila said. "That's where we feel we fit in."