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.
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.
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 ___."
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).
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.
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?
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.
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.