Comment by jkurnia | Hacker News Reader

Comment by jkurnia | Hacker News Reader

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Dear all,

Although I do not agree with Modern Microcredit's allegations that we are intentionally misleading, the discussion that has resulted is a useful one.

As I see it, we have a several options:

1. The status quo: Continue to quote flat interest rates in our website along with an explanation of the calculation in a modal box, and display the dollar amounts paid for each loan for extra clarity.

2. Transition from a flat rate methodology to APR. This would be more in line with the standard used in most lenders' countries, but would be more difficult to understand for borrowers. (It would also require a rewriting of much of our website. Zidihsa has only one web developer, so implementing this option would probably have to wait until have more programming resources.)

3. Continue to use flat rates as the basis for calculating the cost of Zidisha loans, but display the equivalent APR rates along with them. Perhaps Microfinance Transparency could help us develop a tool to facilitate this.

4. Continue to use flat rates, but use the term "fee" instead of "interest." This would be easy to implement and could help lenders avoid mistaking our flat rates for APR, but makes cost comparison with loans in borrowers' countries less straightforward.

Zidisha has little value without transparency, and those who have commented here obviously care deeply about it. I'd welcome everyone's advice on which option Zidisha should adopt, or alternative proposals.

>2. Transition from a flat rate methodology to APR. This would be more in line with the standard used in most lenders' countries, but would be more difficult to understand for borrowers

This statement implies bad-thinking with regard to borrower clarity and understanding. As is well-known and obvious, flat-rate pricing actually obfuscates the true costs. So, to say that it helps borrowers understand is to say that it purposely gives them a false sense that they understand when they actually do not.

Again, this is obvious, and anyone who understands APR and its purpose must make this admission. And, if one makes this admission and still continues to promote flat-rates as somehow clearer to borrowers, then he/she must also admit that he/she is now willfully misleading borrowers for whatever purpose ("simplicity", self-interest, or otherwise).

> As is well-known and obvious, flat-rate pricing actually obfuscates the true costs.

Huh? Flat-rate pricing makes the true cost absolutely clear. If you have N payments with an k flat rate, and principal P, the total of all payments will be P × (1+ k × N). The "true costs" with APR are no more clear.

Declining balance interest (APR) is perhaps a more fair and economically efficient basis for charging for credit, but its not at all more clear as to the "true cost".

Did you read the article?

Perhaps you're using the "generic" definition of APR, whereas the article, most on this thread, and myself are using the U.S.-definition of APR. That is, APR would include fees and non-interest charges.

On a pure mathematical calculation basis, I don't believe either is particularly difficult to understand. It's just that excluding fees--as is is done in flat-rate pricing of the ilk described by the article--is misleading vs. more inclusive APR calculations.

Their loans have substantial fees attached that are not included in the quoted flat rate.

And declining balance loans often have up-front fees that are separate from the quoted interest rates. Fees outside of the stated interest are an orthogonal concern to flat-rate vs. APR interest methods.

Insofar as "substantial fees attached that are not included in the quoted flat rate" obfuscate the costs, that has nothing to do with flat rate interest (obviously.)

>And declining balance loans often have up-front fees that are separate from the quoted interest rates.

As I mentioned in my response to your comment above, you appear to be using the "strict" (mathematical) definition of APR vs flat-rate calculations. In the U.S., APR is generally understood to be inclusive of up-front fees as defined by the Truth In Lending Act.

Whether or not this is perfect in practice, on this thread (and in the article), the term APR is meant to convey a number that is inclusive of all fees and non-interest charges, such that it reflects the truer cost of the loan.

I just wanted to say that I think you've done a fantastic job at responding to this in a way that's largely defused what could've easily become a nasty PR nightmare.

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