Comment by chuckwaterfield | Hacker News Reader

Comment by chuckwaterfield | Hacker News Reader

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chuckwaterfield

Hello Julia,

As founder of Microfinance Transparency, I know very well how confusing pricing can be, due to a combination of confusion of what definition we are using and because of the biases each speaker uses in choosing a definition.

Annualized rates like APR were designed to avoid both flaws. No ambiguity about sentences like "when they tell us they want to borrow $100 at 10% interest, they mean that they wish to repay $110." An APR gets around the ambiguity of how long the client has $100. An APR gets around the ambiguity of if they have the $100 for the entire time or are paying back some of it.

It is an undeniable fact that lenders did not invent flat interest to make things easier for borrowers. They invented flat interest to make the price look cheaper to borrowers. When that abuse comes to light, Truth-in-Lending legislation comes in to defend clients. I expect Zidasha believes more in defending clients than spinning the data for both funders and the clients, but the current policies are arguably more like spin.

I suggest one path forward on this, as I did when you and I spoke March of last year - MFT can provide a legitimate and unbiased method for Zidasha to use to calculate prices, so that the prices you publish more closely reflect true prices.

Regards,

Chuck Waterfield CEO, MFTransparency.org

Hi Chuck,

Thanks for this comment. I'd welcome the help of MFT to develop an APR calculation tool for Zidisha loans. I've just sent you an email, and look forward to discussing further.

Please don't.

I'm a consumer finance attorney who has worked for several years with people from all over the income spectrum who have trouble with finances. No one -- and I mean no one, not federal judges, not banking attorneys, no one -- really understands what APR actually means. It's useful in the US, though, because it means that all borrowing products are calculated the same way, so a consumer can compare the cost of credit from one product to another and it's truly apples-to-apples.

Keep the flat interest. As you say, this is what your customers are used to and it will allow them to make meaningful comparisons with sources of credit in their own markets. An APR will only confuse people and be misleading.

For what it's worth, I'd take the one-time application fee out of the cost of credit calculation and put it down below with an asterisk, like "if this is your first loan with us, there's also a one-time fee of $11 to cover the costs of ___."

They can present the payment schedule table clearly so even if you didn't know what APR was, you would see "I pay this amount of interest on this day" with a total at the end of the term the entire amount of interest. This is what lenders in the US do. That's called transparency. Everything else is playing games to confused people into thinking their loan is cheaper.

I can go to any mortgage calculator online and plug in some simple numbers and get a breakdown of my payments every month, interest on the payments, and total interest paid and I now know how much I am and will pay. This isn't hard, when it isn't done it is to hide information from the consumer.

That's like saying nobody should save because nobody understand compound interest. It is true that hardly anyone understand compound interest (and how amazing it is).

I just wanted to say that I think this might well be the best possible solution to the problem.

When I first visited Zidisha's site (a couple of weeks ago) I spent some time reading through the fine print and discovered the same thing that ModernMicrocredit did: that the way you presented things was highly misleading about actual prices paid by borrowers. (The fine print, of course, was accurate, or I assume it was.) But your choices were made in order to convey things more clearly (to a different audience).

Presenting rates two different ways: using your existing system system based on flate rates AND ALSO an "APR" (calculated according to Western banking practices and including both interest and fees) might meet the needs of both audiences, so long as you can present it in a way that is not confusing. Similarly, show "Average Lender Interest" but also nearby show "Average Borrower Interest".

By the way, at the time I did NOT invest through Zidisha (although I made a note to come back later and reconsider). I am interested in microfinance, and the way you were running it seemed quite appealing; the main reason I did not immediately participate was this issue of misleading presentation of the loan costs to the borrower.

Hi mcherm,

Thanks for sharing this. What if we were to continue to calculate interest and fees using our current flat method for the time being, but display the equivalent APR to lenders and borrowers? As a prospective lender, would this have addressed your concerns about transparency?

Yes, as a prospective lender I would be satisfied if I saw the interest and fees as a flat interest rate (and clearly labeled as such), but ALSO displayed the rate that the borrower was paying in terms that were familiar to me, such as an APR.

I work in the US mortgage industry where advertising of "APR" rates is mandated so consumers can easily compare different offers. Mortgages are still permitted to have all kinds of odd financial arrangements: fees and fee-like structures (points), negative fees (cash-back refinancing, negative points), different payment schedules (interest accrued in advance or in arrears, monthly or biweekly payment schedules), and much stranger things (balloon mortgages, even reverse mortgages), and also many things vary from loan to loan (for instance: some costs vary according to which county you live in).

All of that complexity gets baked into the APR. Fees are amortized over the life of the loan (or sometimes a shorter period). Various kinds of rates get boiled down into an annualized APR. This is far from perfect: no single number can make all that complexity truly comparable, but it roughly does it's job. Each individual loan has an APR calculated once its rates and fees have been set, and marketing messages must quote APR using a sort of "typical loan" for that lender. I think you could develop a definition for "APR" that handled the flat payment method but made it comparable for someone like me.

Isn't this pretty much how all loans are presented in the USA?

As you further investigate this, you may want to look at the UK's requirements for APR calculation for consumer loans. A few nice features:

1. All cash flows which are non-optional from the borrower's perspective are included. This includes one-time registration fees.

2. The rate in annualised to make loans of different lengths easily to compare.

3. Advertisements must include the APR that 66% of borrowers who respond to that specific advert will get. For example, if you expect that a specific advert would generate 100 customers, and the resulting loan offer APRs would be evenly split between 20%, 25%, 30% and 100%, then you would quote 30% APR on your advert.

Excluding one-time registration fees from the APR and total cost illustration is IMO misleading if an ad is mainly targeting new borrowers. The same goes for weighting the APR by loan amount, as this weighted rated can be far from the APR for new borrowers (who, because they are more risky, will get smaller loans).

I have no specific knowledge of your company, and my comments above apply equally to any consumer lending business.

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