Are Income Sharing Agreements Replacing Payday Loans?

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Revenue sharing is not a common method of funding as of 2019 – although in recent times it has started to garner much more interest from investors and innovators, especially in the context of the student loan financing. The basic structure of the program in a student income sharing agreement is that an investor essentially pays a student’s tuition on the condition that when the student graduates and starts working, he gives up. a portion of its future income during a given period. .

There are a variety of players in the field pursuing these kinds of education funding arrangements. Purdue University was the first major research university in the United States to offer a revenue sharing agreement to its students. On the startup side, the best-known and best-funded actor in the sector is the Lambda School, founded in 2017. Valued at $ 150 million, Lambda has benefited from investments from Bedrock founder Geoff Lewis, as well as Google Ventures, GGV Capital, Vy Capital, Y Combinator and actor Ashton Kutcher.

In education, the model makes sense, according to Austen Allred, Co-Founder and CEO of Lambda, because it aligns incentives more correctly in the education sector. Students have collectively incurred $ 1.5 trillion in debt, and they must pay back whatever actual career outcomes they experience after graduation. Schools, he noted, should have some skin in the game.

“No school has any incentive to make its students succeed anywhere. Schools are prepaid, they are paid in cash – whether it is by the government or by an individual doesn’t really matter, ”he told PYMNTS. “At the end of the day, schools get paid no matter what. I think in order to create better results the school has to take the hit.

Plus, it’s a smart investment to make – motivated young students early in life as employees, who have every reason to be successful, are an overall great investment.

However, will the model also work for people who are not in training for their careers, but have in fact already started it. Can income sharing be a traditional loan alternative for workers? Adam Ginsburgh, COO of Align revenue sharing funding, said his business was founded on the theory that it could work, giving workers a much better income-smoothing alternative than payday loans.

“When we first started looking at this model, it occurred to us [that the same] mindset could be applied to workers for general domestic purposes, ”said Ginsburgh in a meeting.

The system works the same as its educational counterpart. The client applies and is assessed based on Align’s assessment of their income level, credit history and other data characteristics (owners). They are then offered the option of borrowing between $ 1,500 and $ 12,500 on their income. The consumer then agrees to repay the loan at a fixed rate that ranges between two and five years. The average term of a loan on the platform, so far, is around three years and the average loan amount is around $ 5,000. Customers get a repayment schedule of two to five years, and the contract says it won’t take more than 10 percent of someone’s income.

However, in this case, the use of the term “to lend“is a little misleading. Align applies underwriting standards when evaluating clients, because what it is offering is technically – and more importantly, and legally speaking – a loan. In a revenue sharing agreement, the entity providing the funds does not lend the money to the borrower, but invests in a worker’s future income in the hope of a return.

Hope, in particular, but not a guarantee. This is one of the important points that separates invested funds from loaned funds, but more on that in a second.

Because of this legal status, it is not clear whether Align and companies like it are required to comply with federal “truth about lending” regulations, which require borrowers to receive a sheet telling them the effective interest rate, or whether they have to comply with things like state-regulated caps on APRs. The most common opinion is that they don’t, although the arena is still so new that it remains a gray area.

The most differentiating facet of the statute is that the payment term is set at five years – and consumers are not obligated to pay if they lose their jobs (through no fault of their own). The payments “continue”, but the consumer makes a payment of $ 0 in each month that they are not employed. If the time elapses before the full amount has been refunded? The investor has no more money, just as they would be if they bought a stock that was falling in price or invested in a startup that was not working.

Align’s underwriting standards are intended to prevent these kinds of losing bets, and the repayment period and terms offered to the consumer reflect the level of risk an investor takes. Still, given the option between a revenue-sharing agreement and a payday or short-term loan, the comparison is favorable. There are no endless and inevitable debt cycles, or years of calls from a collection agency – the consumer always has expiration data known at the start of the deal.

However, Align may also charge high rates, particularly if a consumer’s income increases significantly during that five-year period. This issue sparked controversy when Arizona Attorney General Mark Brnovich recently cleared the startup to operate in Arizona, despite the fact that its products effectively charge more than the 36% APR at which state law applies. Arizona caps interest rates. Brnovich is licensed, however, under a new state “Sandbox“, to allow consumer loan exemptions to allow businesses to try new or unusual financial programs in Arizona.

“Allowing Align in the sandbox is giving a new business model the opportunity to show that it is different under state law,” Brnovich noted in a commentary. Release. “We think they have a legitimate argument that this is not a consumer loan under state law.”

Additionally, he noted, since it’s not clear whether the business model is subject to state loan laws, it’s also not clear whether Align even needed his permission to operate in Arizona.

“Here we have the chance to see how it works in a controlled environment, how the company interacts with consumers and ultimately whether their product is proven successful,” he said.

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NEW PYMNTS DATA: TODAY’S SELF-SERVICE PURCHASE JOURNEY – SEPTEMBER 2021

On: Eighty percent of consumers want to use non-traditional payment options like self-service, but only 35 percent were able to use them for their most recent purchases. Today’s Self-Service Shopping Journey, a PYMNTS and Toshiba Collaboration, analyzes more than 2,500 responses to find out how merchants can address availability and perception issues to meet demand for self-service kiosks.

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