The Mirage of Ethical Non-Prime Lending

Think of the highest interest Annual Percentage Rate (APR) you’ve ever heard of for any type of debt. Double it. Where did you land? I think for most you’ll be looking at somewhere in the range of 80% APR, maybe 100% APR. Those rates are astronomically high but what if I were to tell you there was a publicly traded lender that averaged 500% APR on their consumer loans? If your first thought was “holy shit” then you are now right where I was six months before starting to write this essay.

Everyone Starts With Good Intentions

The company I discovered was Enova International (NYSE:ENVA), a digital lender generating $1.12B in annual revenue. Their business model relies on offering loans with APRs averaging around 500%, targeting non-prime borrowers who often have no other options. I thought, "How is this possible? Why isn’t anyone undercutting them aggressively to take away market share?”

With this question in mind, I began researching consumer lending. I learned about Dave.com, Empower.me, Bridgit, and various other venture-backed players in the space. Each of these companies started off with good intentions but ended up slowly becoming more aggressive at reclaiming capital, and ratcheting up the cost of capital over time due to pressure from their investors and competition. They each had rapid growth often hitting one million active users within months which powered future venture rounds and then the reality of “growth at any cost” set in and they had to result to more predation than they originally intended.

Everyone I talked to thought building a product to undercut predatory lenders was a really good idea. So much so that I should have become suspicious - if it is so obvious why has nobody else done this? Instead, I was just like “Wow this is so obvious, why has nobody else done this!”. It turns out this is the kind of mirage that many other people can also see, which makes it that much more confusing when it disappears right before your eyes.

Nobody Wants You Here

I found a co-founder, we built a product and launched. That was one sentence in this essay, it was 4 months of work in reality. The main reason was that we kept getting bucketed as “high risk” by everyone due to the nature of non-prime consumer lending.

You want payment processing? You want loan origination? You want money movement of any kind? You want help with underwriting? You want to connect to your users financial accounts to get transaction data? You want KYC?

The answer to all of those questions is one loud and resounding “Go fuck yourself.” in unison from all of the vendors in fintech if you are building a non-prime consumer lending product.*

*the one notable exception here was Pave shout out to Ema and the team over there - they understand this space deeply and were an incredible underwriting partner for us!

The Market Reveals Itself

One of our first major challenges was adverse selection. We quickly realized that while our advertisements were extremely successful, we were attracting a disproportionate number of high-risk borrowers. Many had a history of defaulting on loans, some had no intention of paying back the loan to begin with, and some were outright fraudsters. For every 100 applications we received, we approved 5. The costs of ad spend, KYC checks, and underwriting for the 90-95 rejected applications were significant, eating into our margins before we'd even issued a loan. The cost to underwrite was around $1.50 per application no matter the outcome of the application.

We also found that most customers didn't seem to care much about APR. When you're in a situation where you need $500 immediately to avoid eviction or keep your electricity on, the difference between 40% and 500% APR feels abstract and distant. Our main value proposition - significantly lower cost of capital - did not matter. Customers often maximize their borrowing by stacking multiple loans and advances, regardless of interest rates. Our product was adding more debt to the pile, not being chosen over other products. Also known as “making the existing problem worse".

The economics of the business were also proving to be brutal. Let's say we issue a $200 loan and expect $220 back in 4-6 weeks. If that loan defaults, we're not just out the $20 profit - we've lost the entire $200 principal. To break even on that single default, we'd need 10 successful loans of the same size. And that's before factoring in our operational costs - ad spend, support, KYC, and underwriting.

We were offering a marginally better option in a fundamentally flawed system. The core problem isn't just high-interest loans - it's the economic conditions that make people dependent on such loans in the first place. Poverty isn't solved by easier access to credit, even if it's fairly priced. It's solved by increasing incomes and the baseline standard of living.

Could we have made the business work? Probably. But at what cost? We'd be another player in a system that fundamentally profits from financial distress at no benefit to the customer.

The Language of Good Intentions

Looking back, I learned an important lesson: it’s difficult to solve structural problems with incremental solutions. The fundamental issue isn't access to credit or cost of capital - it's the mismatch between income and expenses. As Rohit Mittal put it, “The best fintech product is the one that gives you more dollars.”

Look at the mission statements from companies in this space:

Empower.me: "improve financial security"
Brigit: "build a brighter financial future"
Dave: "level the financial playing field"
Enova: "helping hardworking people get access to fast, trustworthy credit"

Only the last one, from the openly high-interest lender, approaches honesty. The others wrap predatory lending in the language of empowerment - a semantic sleight of hand that helps employees sleep at night while changing nothing for customers. We almost fell into the same trap.

Conclusion

I started this project because I saw what seemed like an obvious opportunity: undercut predatory lenders with fair rates. The solution felt so clear that I should have been more skeptical. Instead, like many others before me, I had to learn through experience why this market works the way it does.

The reality is that you can't fix structural poverty with marginally (or significantly!) better loans. We weren't failing because we couldn't execute - we were failing because we were trying to solve the wrong problem.

The high interest rates in this market aren't the cause of the problem, they're a symptom of it. Low interest rates in this market are not a solution to the problem, they’re a contributor to it.

I wrote this essay partly to document my own journey, but mostly to explain something I wish I had understood earlier: in non-prime lending, adverse selection and price insensitivity aren't just business challenges to overcome. They're market fundamentals that explain why this industry works the way it does. They should keep you up at night - these are the forces that will make your customers' lives worse, not better unless you figure out a way around them.

(thanks to akiff and anu for sharing feedback on this!)