World Finance offers installment loans with fixed monthly payments to credit-challenged customers. Henry Coffey of Sterne Agee compares them with payday loans but they are more affordable.
Former employees say World encourages clients to renew their loans. Often this allows them to qualify for bigger loans. World says that it also helps them to repair their credit scores.
How to Get a Loan
World Finance stores (that is what the company calls themselves) offer installment loans that are paid back in monthly installments for consumers who have credit problems. Borrowers use household items such as computers, televisions and power tools to secure loans. The rules from decades ago prohibit lenders from asking borrowers literally to offer their shirt off their back. However, World can still ask for chainsaws and jewelry.
Former employees of World said that the company encourages borrowers who renew their loan to do so because it allows them to earn more fees and keep them on the hook. World also reports loan payments, which can help boost a person’s credit rating.
The company declined to speak with Marketplace, but in an open letter to ProPublica denied that it misleads customers. It stated that its staff has been trained to tell borrowers that the insurance products they purchase are voluntary and it never attempts to seize collateral. It also denied contacting borrowers’ employers, and claimed that it only uses lawsuits when necessary.
Interest Rates
Interest rates can seem confusing, but understanding how they function is essential. The infographic below explains how interest rates affect the true price of a loan and how lenders make money on credit.
World focused on the “subprime” market, charging high rates of interest and fees for customers with low incomes and previous credit problems. The high rates caused some customers to overextend, and World had a bad record of collecting from those who couldn’t pay.
The competition from large consumer finance companies, and credit card providers, increased in the mid-1990s. World was forced by the competition to lower loan rates and reduce losses. World was able to increase its profits and use them to pay for acquisitions.
Collateral
Collateral is something of value that a borrower pledges to secure a loan or line of credit. This can be physical assets like vehicles and investments or intangible assets such as personal guarantees or future cash flow.
Typically, lenders accept only valuable assets as collateral. Cash (in a savings or checking account, money market funds or certificates of deposit), cash-valued life insurance policies and inventory are examples. Stocks and bonds can also be used as collateral, but they are less popular among fintech lenders because their values can change quickly.
Lenders can reduce risk by accepting collateral and approve more loan applications or offer lower interest rate. But it’s important for borrowers to consider the potential risk of losing their assets and make sure they’re financially able to afford any loss.
Fees
Many lenders charge you a variety fees at the start of your loan. Loan origination fees are one example. These fees vary by state, and can be either a flat rate or a percentage. NSF fees are another fee that can be charged. These fees are for payments returned because of insufficient funds. They may also include government fees such as those related to perfecting the lien on a vehicle’s certificate title.
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