The most well-known way of getting a payday loan is by visiting a storefront lender. Storefront lenders highly encourage walk-ins and don’t require to schedule an appointment in advance. Storefront lenders have been operating in the U.S. for many years. They continue to be a profitable industry despite restrictions and regulations.
Storefront Lending Opportunities and Challenges
Storefront lenders offer advantages to borrowers who need money. However, there are also some challenges that consumers using storefront lenders might face.
Opportunities
One of the most significant advantages that storefront lenders have is that they may allow some borrowers to access funding sooner than traditional lenders. Storefront lenders may approve to grant a payday loan immediately and fund the money in a short period. Not having to make borrowers wait for too long is a huge convenience.
Compared to traditional lenders, storefront lenders offer more flexible loan packages and loan terms. Storefront lenders may help people who have a poor credit score. For example, some storefront lenders give their borrowers the option to pay back their loan by their next paycheck or pay back the loan over time, dividing the outstanding amount and the interest fees into several installments.
To operate under state law, storefront lenders must have a license from the state that they work in. They should also abide by the state’s payday lending rules and regulations. By doing so, storefront lenders and borrowers are protected by state law, which is a benefit. Also, storefront lenders have to respect the maximum annual percentage rate (APR) imposed by the government.
Storefront lenders give their borrowers the opportunity of human interaction. It is true that payday lenders also operate online. However, some borrowers feel more at ease when having face-to-face communication with the lender about sensitive topics such as borrowing and lending money. By having a brick-and-mortar store, lenders allow their customers to get to know them better and understand the lending process by providing immediate answers to their questions in real-time without making borrowers wait. This can also help speed up the lending process if the client needs money to address an emergency.
Challenges for the Consumer
Storefront lenders may find it challenging to ask their borrowers to present them a post-dated check. Lenders request a post-dated check as a guarantee that the borrower will pay back the borrowed amount. Lenders may cash the check on the due date if the borrower doesn’t pay back the loan on time. However, nowadays, most borrowers don’t possess a checkbook. Asking borrowers to go to their bank to request a checkbook and then return to them may cause some challenges.
Some borrowers prefer to work with online lenders because they might consider them more convenient. Visiting a storefront lender to request a loan can be challenging for borrowers with busy schedules or mobility restrictions. Also, clients may need to revisit the storefront lender to pay back the borrowed amount.
Challenges for the Storefront
One of the most significant challenges that storefront lenders face is finding customers. Compared to online lenders, storefront lenders may have a hard time finding new customers. This is because online lenders can efficiently market their financial services online, whereas storefront lenders rely on traditional advertising and marketing. Hence, dealing with online competitors will pose some challenges to storefront lenders. Putting up an official website of the store or a storefront lender’s blog will improve marketing and reach a broader audience that may be interested in payday lending services.
It is also important to note that some states prohibit storefront lenders from operating either online or in-store. To learn all about storefront lending and all about online lending in your state, people must check with their government’s official website regarding small-dollar loans.
The Value of a Risk Model to Storefront lenders
Value at risk, also referred to as VaR, is a statistic that measures and quantifies the level of financial and monetary risk within a firm. Using VaR’s data, lenders will determine the extent and occurrence ratio of potential losses within their business. VaR also helps measure and control the level of risk exposure.
Storefront lenders may work with people who have bad credit scores. Also, storefront lenders usually ask for minimal documents such as a government-issued ID to avoid fraud, checking account, proof of income to assess the borrower’s ability to pay back the loan, and proof of residence. Some storefront lenders may also ask for the borrower’s credit history to determine the ability to pay back the loan based on past credit performance. Often the required documents to apply for a payday loan aren’t sufficient data for lenders to calculate their company’s value at risk.
Business Models Used by Storefront Lenders
Many payday lenders use the following business models to increase profits and reduce risk. The first model is called traditional consumer finance, where lenders impose high-interest rates. By using this model, lenders can also charge penalty fees and NSF fees if the borrower fails to pay back the loan on time.
The second model is called microcredit. Microcredits are small loans designed to support entrepreneurship and alleviate poverty. This model is used for borrowers who lack collateral, proof of steady income, or credit history.
However, neither of these models is ideal for calculating the cost-effectiveness of the company. On the other hand, lenders can use increased computing powers and new data sources such as utility-bill payment history and other expenses to build better risk models. With more assets, storefront lenders can make responsible lending decisions in low-cost ways.
How to Succeed in Taking Bad Credit Loans
To succeed in their industry, storefront lenders have to take many things into consideration. First, the storefront lender must have a successful team that consists of a lawyer, accountant, and a compliance officer. Having a lawyer and a compliance officer by your side as a storefront lender is crucial to provide legal assistance. Having an accountant is also vital when working in the field of finance and lending to run the business, keep it organized, track income and expenditures, and most importantly, help the lending business grow.
The next step to be a successful storefront lender would be to get all the necessary licenses from your state to operate legally. Some states might ask for local and municipal licenses, too (this is where your lawyer will come in handy). Storefront lenders must also familiarize themselves with debt collection laws.
After picking a target market, storefront lenders must determine their loan capacity and the type of loans that they want to lend, be it secured or unsecured loans. Then, storefront lenders must decide how much interest they will charge, referring to state laws. They should decide how much they would charge for the origination fee, late fees, and prepayment fees. However, it is best not to charge any fees other than NSF fees to stay competitive and attract more borrowers. Lenders must also create their contract and approval rules with the help of their team.
One Last Tip for Lenders
Always request an applicant’s credit score from the credit scoring companies and not directly from the applicant. Consumers may present a fake credit report, claiming their score is higher or lower than what it actually is.