ZestCash Takes a Bite Out of the Poor

Using a different definition of neighborhood than that for the predatory lenders surrounding me here in 78745, there is now an on-line predator, ZestCash, which is currently making loans in Idaho, Missouri, South Dakota, Utah, and Wisconsin with aggressive expansion plans fueled by an earlier capital influx of $19 million and more recent funding of $73 million. The actual rate at which money is loaned is unavailable, and the website gives a maximum of 350% APR (in conflict with the table below), noting that this is 50% less than payday loans. Supposedly money will be available at a lower rate using data collected by Gilad Abaz, an investor and the founder of Factual, to better predict the likelihood of loan repayment than a credit report. This is obviously critical to the success of any loan company, and the number and amount of loans that are not repaid will in theory determine the actual interest rate ZestCash charges. Founder and CEO Douglas Merrill believes that he has algorithms which will lead to better repayment predictions using Abaz' data. Merrill stresses that ZestCash does not make payday loans, which are typically due in 2-4 weeks and can be rolled over at even greater expense. ZestCash does not roll over its loans, and there is a longer repayment term. This web page makes this point in the following graph.

While it is true that most payday loans are rolled over at least once, and sometimes lead to spiraling debt with multiple rollovers, it is also true that this graph compares apples and oranges in arriving at the conclusion that ZestCash charges 50% less than payday lenders.

A very positive review from Leena Rao in TechCrunch begins by emphasizing that ZestCash is targeting 60 million underbanked Americans who do not qualify for more conventional loans. From the review and the ZestCash How it Works page, underbanked people have a checking account for direct deposit of the loan and withdrawal of payments. In practice, this means that they will only loan money to people who can have a checking account because they do not have a credit history of unpaid charges for insufficient funds and overdrafts. With this kind of credit history, at my credit union you can open both a savings and a checking account with $10 and $5, respectively, and receive a $500 payday loan that costs about $7, so how can ZestCash be considered a good deal for these people?