We lenders are a creative bunch! State or FED mandated 36% APR maximum?

I now introduce Finova Financial – online vehicle title loans – as a case study in advertising sub-36% APR’s while achieving a nearly 200% APR.

I toss this out to help you and your Team get your creative juices flowing. A little inspiration…

PS: I’m not a lawyer! Don’t make these loans without competent legal advice! AND, this piece is long. If you prefer mickey mouse “Click Bait” content visit Buzzfeed.com

Finova is a 100% online, mobile, anywhere 24/7loan platform advertising a line-of-credit loan product collateralized by the title to a car. “Complete the loan process online, instant approval, with same day cash funding.” In reality, the borrower receives a lump sum when the loan is approved. Roughly 2,000,000 title loans were funded last year in the USA; obviously not all by Finova. Finova is operating in 7 states last time I counted.

The typical Finova title loans are amortized over 12 months; no balloon at the end. The loan transaction does NOT require any face-to-face interaction. Hint: borrowers who lack bank accounts make their monthly payments via MoneyGram’s 30,000+ locations [MoneyGram fee is $11.00 each] or by credit and debit cards.

To be crystal clear how these vehicle title loans work, here’s a testimonial posted by a happy Finova Financial client taken from their website:

Finova had the whole “take a picture and text it” text message. I clicked on it which made it easier to be able to upload everything. Everything was done electronically and I didn’t have to go to a location. I had to mail off my title but other than that I didn’t have to go into an office and sit down with anybody. [Full testimonial below.]

According to Finova’s last “Pitch Deck:”

• Their average loan size is $1,665.
• Life of Loan is 12 months.
• Target revenue is $3,060.
• They have a 10% retention rate at maturity.
• Estimated Customer Lifetime Value [CLTV] $3,366.
• Client Acquisition Cost [CAQ] $88.
• CLTV/CAC = 38X
• Avg. 1^st customer payment $298.
• Clients have returned up to 5 times for new loans.
• 15% of the portfolio has had multiple Finova loans.
• Avg. Loan to Value [LTV] 30% of retail value
• <50% of Blackbook Rough Wholesale value.
• <10% default rate.

The vehicle title loan funds are credited to the borrower via ACH, retrieved at MoneyGram or in the ideal Finova scenario, to the privately branded Finova Secured Debit Card.

According to publicly available info posted on Nerd Wallet, [As I understand it, NerdWallet Co-Founder Jake Gibson participated in one of the capital raise rounds for Finova Financial] “a typical Finova Financial customer borrows $1,700 and qualifies for an APR of 22.5%. Finova’s stated APR ranges from 17% to 30%, but adding fees and the cost of insurance for a $1,700 loan, the effective APR is actually 187%.”

So, how does Finova Financial achieve these >36% APR’s?

And how is it that Finova can participate in the Google Adwords program? How can Finova Financial be compliant with Google’s loan advertisement policies?

Let’s count the ways…

A 36% APR? Don’t ASSume that means you can only charge your borrower $360 per year for a $1000 loan!

Know this about APR’s:  The Annualized Percentage Rate is defined as the annualized finance charges expressed as a percentage of the amount financed. This rate has to be disclosed in the contract under the TILA. The stated APR includes certain fees, such as origination, that the interest rate does not; both exclude costs for ancillary products.

Example?

Finova Financial offers a Car Equity Line of Credit (CLOC) via a cloud-based, digitally delivered  loan – No Brick and Mortar locations –  based on car equity and the “Finova Automobile Secured Prepaid Card,” which accepts either cash or car equity to fund the card.

This group is SMART!

Here’s what one customer wrote about them on their website:

“Finova had the whole “take a picture and text it” text message. I clicked on it which made it easier to be able to upload everything. Everything was done electronically and I didn’t have to go to a location. I had to mail off my title but other than that I didn’t have to go into an office and sit down with anybody. I had a digital title which was a pain in the butt but Finova was awesome with their help. I dealt with two different people because I called when one had already gone home. They picked up seemingly with no problem, so it made me feel good that they work so close together that if someone wasn’t home, the process doesn’t stop.”

“Also, I enjoy the fact that I got the reminder text because it helped me make my first payment. Everything was good to go and I was able to make my payment on time. Plus the ease of being able to make a payment is spectacular. You just go right to Walmart or wherever you want and make that payment with no problem.”

Finova Financial advertises <36% APR loans.  Google accepts their advertising! So how does Finova achieve 100%+ APR’s?

Again, according to Nerd Wallet:

Finova funds a client $1,700. The average borrower qualifies for an APR of 22.55 [This depends on where the borrower resides.] Finova’s stated APR ranges from 17% to 30%, but adding fees and the cost of insurance for a $1,700 loan, the effective APR is actually 187%.

Here’s a breakdown of the costs associated with Finova loans:

• Extra fees: Not all fees are included in the APR you receive. On top of the rate you qualify for, you’ll have to pay a $25 “credit investigation” fee.
• Insurance costs: Finova requires borrowers prepay for 12 months of comprehensive and collision insurance or buy an optional form of insurance from the company, known as a “DCC – debt cancellation addendum.”
  • Finova requires that their borrower provide Finova with proof of comprehensive and collision insurance on the vehicle, with a deductible of $500 or less, through a properly licensed insurer. Such insurance must be reasonably acceptable to Finova, name Finova as loss payee, and show proof the policy is paid through the maturity date of the loan. In the event that you do not provide adequate proof of such insurance, you must obtain Finova’s Voluntary Debt Cancellation Addendum.

Finova’s customers are typically sub-prime vehicle title loan borrowers. They don’t have the CASH to pay up front to an insurance company for a $500 comprehensive and collision insurance policy. So… MANY Finova Financial vehicle title loan borrowers ELECT to purchase DCC coverage.

What’s that you ask? What is a Debt Cancellation Contract (DCC)

According to Investopedia:

A debt cancellation contract (DCC) is contractual arrangement modifying loan terms. Under the debt cancellation contract, the Lender agrees to cancel all or part of a customer’s obligation to repay a loan or credit. These contracts become effective upon the occurrence of a specified event as written into the contract. A debt cancellation contract (DCC) provides for the cancellation or suspension of loan payments when it becomes difficult, or impossible, for the borrower to make payments. These events may include an accident or the loss of life, health, or loss of income. Other reasons for debt cancellation include military service, marriage, and divorce. This product is also known as a debt suspension agreement (DSA)

DCC’s do not sell through insurance agents, brokers, or other intermediaries. They are a feature of the extension of credit, provided by the Lender.

DCC terms and costs are designed by the Lender.

DCC’s supposedly increase borrower “loyalty and satisfaction.”

DCC’s offer fee income potential for the Lender

There are NO licensing restrictions for selling DCC’s.

The Lender determines the borrower’s price for the DCC.

Here’s a link to a typical DCC provider: https://www.avpadmin.com/lenders/

Now, we all know that consumers are not nearly as dumb as the folks in D.C think they are. Our customers are simply budget constrained; big time! Several focus groups have revealed that a surprisingly large percentage of consumers know the difference between stated and all-in APR’s. “There’s a big difference between the [stated] percentage rate and what you’re really being charged.”

Pew has some interesting revelations and stats here: PEW

From PEW:

As an example, a stated APR for a nine-month, $511 loan issued in Kentucky was 43 percent, but the all-in APR was 138 percent.”

Because the lender sold credit insurance with the loan and financed the $203 lump-sum premium, the amount financed increased from $511 to $714, which resulted in higher interest and other charges.

 When all the fees and insurance premiums were included, the all-in APR was 138 percent, three times more than the stated APR.

Depending on the state, Lenders are typically allowed to sell the following types of “insurance:”

• Life: repays a loan’s outstanding balance to the lender if the borrower dies. The payout decreases the longer the loan is outstanding because the policy covers only the remaining loan balance.
• Accident and health or disability: Makes the monthly payments to the lender if the borrower becomes disabled during the loan term, continuing until the borrower recovers from the health issue or the loan term ends, unless other policy restrictions apply or limit coverage.
• Involuntary unemployment: Makes required monthly payments to the lender if the borrower loses his or her job during the loan term until the customer finds new employment.
• Property: Covers the value of property pledged to secure a loan if a lender is unable to repossess the property for any reason.
• Nonfiling: Protects lenders against losses up to the value of the collateral in the event a borrower defaults and the lender did not undertake the time and expense to file the paperwork to register a security interest in the property.
• Installment lenders also are often allowed to sell accidental death and dismemberment insurance that makes loan payments if a qualifying event occurs.
• Lenders can also sell auto club memberships and automobile security plans.

WTF? Blockchain next for Finova Financial?

That’s another Post. Read about Finova’s plans for raising capital via Blockchain here: Finova Financial & Blockchain.