Last week, I found myself in an unexpected Twitter war with Sean Murray @financeguy74, an advocate of the short term on-line lending and merchant cash advance industry. Mr. Murray summed up our battle in a post.
The crux of our debate is fairly simple to me. Mr. Murray thinks it is fine for lenders to disclose the hard cost of a loan, without including a rate. I believe that while it's fine for lenders to include the hard cost of the loan, they should be required to include the effective APR next to it.
I think an example is helpful that I included in a recent post.
If a lender offered you $55,000 with a payback of $60,500 (a daily payment of $960.32) and an origination fee of $1,375 what would you think? On the surface, it sounds quite reasonable. You might do the math, and think it's going to cost about $7,000 or about 12%. If you're in a rush and tight for time (as most entrepreneurs are) it seems like a no-brainer.
Now imagine a second scenario. What if the lender shared all of this information with you, and then let you know that the effective APR of the loan was 100.85%. At that point, unless you're desperate for the money or have a clear path to paying it back, any right minded entrepreneur would hunt for a more affordable way to get the money.
So my question to Mr. Murray and his industry is quite simple, why not include the APR as a part of the disclosures? In our loan brokerage, when we have no other choice to put a client in a product like this we strongly advise them against it, and calculate the APR and disclose it to them. Armed with the proper information, at least half the borrowers choose not to take the money and find a different path.
As a result of our work, 3% of the debt we place is in these short-term financial instruments, and 5% of all of our debt has an effective APR of 25% or higher.
In his post about our twitter war, Mr. Murray took the time to find a picture I posted on Instagram of my shadow as I watched my son play lacrosse on a fall day a few weeks ago. It's interesting when I look in my shadow I look at the results of our work at MultiFunding and am proud of what we are accomplishing. I wonder what Mr. Murray sees in his shadow.