Spike Hosch was working at a bank in Mongolia when he read about the interest and fee rates of payday lenders in his home state of Louisiana, where he says two-week payday loans can carry an effective APR of higher than 700%.
“I realized then that legal lenders in Louisiana charge more than illegal Mongolian loan sharks,” Hosch says. “That seemed insane to me.”
Inspired to take action, Hosch reached out to the University of the South and the South Cumberland Community Fund for help devising an organic solution to a problem he calls “predatory loans.”
These advances – which include payday, title and flex loans – are easy to find in Tennessee, where more than 1,200 predatory lending locations operate. This is the highest number of such lenders in any U.S. state, a 2017 report by urban policy startup Metro Ideas Project reveals.
Predatory lenders are packed together like cattle in certain districts in Chattanooga. Brainerd Road, for example, is home to a staggering number of red, yellow and green signs declaring “PAYDAY LOANS,” “CASH ADVANCE” and “FAST CASH” like garish oases in a financial desert.
The promise of quick and easy money is designed to lure in the people of “poverty, color and low educational attainment” who live in the communities where predatory lenders set up shop, suggests the Metro Ideas report.
The astronomical APRs in Louisiana that shocked Hosch are present in Tennessee, as well. Although state law caps payday loan interest at 15% of the amount borrowed, the actual rate borrowers pay when calculating the effects of compounding can reach 460%, informs UStatesLoans, which offers analysis of payday lenders.
Despite the prevalence of predatory lenders in Tennessee, Hosch found most community development financial institutions (CDFIs) were not providing small loans as an alternative or a solution, although churches in some rural areas were beginning to address the problem.
“The small churches and nonprofits I found trying to extend credit did not want to be in the credit business, so I began to put together a plan to establish an alternative to predatory loans – or at least an organization that could help people escape the predatory loan debt trap,” Hosch recalls.
Hoping to help individuals and families caught in a cycle of predatory loans pull off the financial equivalent of Houdini escaping a devious trap, Hosch founded BetterFi (betterfi.co) at the end of 2017. During the outfit’s pilot phase of operations in 2018, it made 10 small consumer loans to help its principals identify the infrastructure they’d need to have in place to be able to offer a viable alternative to predatory loans.
BetterFi received its 501(c)(3) status shortly thereafter; the U.S. Department of Treasury’s CDFI Fund then certified the nonprofit as a CDFI in 2021. Hosch hired a part-time employee to begin focusing on Hamilton County last year and is gearing up to open a brick-and-mortar in the county in early 2025.
In short, BetterFi offers credit and supporting financial fitness services.
“We’re a bit abnormal in that we’re a 501(c)(3) as well as a financial institution,” Hosch clarifies. “But our name indicates what we truly hope to be: a better kind of finance.”
BetterFi’s primary service, ReFi with BetterFi, refinances predatory loans so the borrower can pay down the loan, build their credit history and improve their credit score.
“Essentially, we help individuals who are stuck paying and paying and paying on a payday, title or flex loan,” Hosch explains. “For approved clients, we refinance their existing loan at much lower rate so they pay us instead, but then the vast majority of their payments go toward paying down the loan, which is not the case with payday, title or flex loans.”
On a flex loan of $1,000, the minimum monthly payment would be close to $262 but pay off only about $30 of the loan, with the other $232 covering interest and fees, Hosch estimates. However, a payment of $262 to BetterFi on a $1,000 loan would pay the loan down about $240, with $22 going toward the interest.
“We charge so much less that most of our clients can pay about half of what they’d pay with a flex loan per month but still pay off their loan in a year,” Hosch says. “The typical BetterFi borrower saves thousands of dollars compared to what they’d pay with a flex loan.”
Hosch estimates that BetterFi has saved its borrowers over $1.6 million to date. This would include the money it saved a client he calls “Jodi,” a Black senior living on a modest pension and Social Security benefits.
“A year and a-half before contacting BetterFi, Jodi walked into two predatory lenders on Brainerd Road and less than an hour later walked out with nearly $2,000 in cash for Christmas expenses. Jodi made her first, second and third payments before realizing her loan balance hadn’t decreased at all,” Hosch says.
Jodi’s credit history was perfect but “thin,” Hosch notes. With her limited credit history and income, her bank wouldn’t extend credit to enable her to escape the predatory loans, so for 18 months, she paid every dollar she could spare on the two loans – between $400 and $500 each month.
Even on an income of $1,387 per month, Jodi managed to avoid overdrafting her bank account, but despite consistent and substantial payments on the loans, their balances ticked upward again and again, Hosch says.
After paying more than $7,500 in interest and fees to the predatory lenders, Jodi found BetterFi, which refinanced the $2,261 she still owed on the loans in May 2023. After 12 monthly payments of $209.44, Jodi had paid just over $251 in interest to BetterFi and paid off the refinanced loan in its entirety.
“Were it not for BetterFi, Jodi would’ve been stuck paying hundreds of dollars per month until eventually having to decide between continued repayment to the predatory lenders and collections, during which the lender could repossess her car or attempt to garnish her pension,” Hosch says. “Jodi was able to scrap and scrounge to get by, but for many individuals or families living on so low an income, $240 per month in liquidity could be all that stands between ‘getting by’ and facing cut utilities or eviction.”
While BetterFi does examine each applicant’s credit history, Hosch says there are no credit score requirements for loan approval. Rather, the circumstances in which the potential buyer finds themselves carry more weight.
“A good candidate for our ReFi program is someone who’s stuck paying on a payday, title, or flex loan but can’t seem to get out of it. We probably wouldn’t approve someone who’s looking for a cash loan or a loan to cover a regular bill.”
The application process for ReFi with BetterFi usually takes one or two business days since the nonprofit wants to ensure that refinancing will place the applicant in a more stable and sustainable financial position, Hosch continues.
In addition to providing low-interest loans, BetterFi aims to improve the financial IQ of its clients. To this end, the nonprofit offers financial coaching that covers personal cash flow, how credit scores work and the basics of debt, including how to identify predatory loans.
“Getting folks to spend time on learning about finances isn’t easy, even though it’s one of the most important factors in their life,” Hosch laments.
Before the end of 2024, BetterFi will also begin to offer a Savings+Credit Builder program that will enable individuals to build $500, $1,000 or $1,500 in savings over either five or 10 months while benefiting from credit reporting.
“This program will involve quick approval so people can benefit from credit reporting while saving for a rainy day,” Hosch says. “By the time someone needs a loan, it’s usually too late to build a good credit score.”
Because BetterFi is a small operation – Hosch is one of only three staff members – these programs are also relatively small, but its founder hopes community support will help them grow and become a viable option for beleaguered borrowers across Tennessee, he says.
“We frequently rely on AmeriCorps service members, as well as service interns from a college in Sewanee, to help deploy financial coaching and free income tax preparation.”
The need for an escape hatch from predatory loans is great across Tennessee, including Chattanooga, Hosch claims.
“We estimate that 26,500 households in Hamilton County owe a minimum of $40 million in payday, title and flex loans. The actual amount is probably far higher, but $40 million in super-high APR loans means that close to $110 million is being siphoned every year from our neighbors in payday, title and flex loan interest and fees.”
Regardless, BetterFi needs help spreading the word about its services as it prepares to open a physical location in Chattanooga, Hosch says.
“If your church, business or employer knows people who have taken out high APR loans and want to get out of them, we want to talk. We already have a number of great Hamilton County referral partners including Consumer Credit Counseling Service, Northside Neighborhood, Metropolitan Ministries, First Baptist and First Presbyterian, but we want to be working with everyone.
“We want people to start asking, ‘What could Hamilton County residents do with an extra $110 million each year?’”
Even as Hosch calls for as many referrals as Chattanooga can muster, BetterFi is still building its reservoir of resources. This will take time, he says, as well as financial support.
“We have a plan for becoming more self-sufficient, but reaching that stage will take time and success. In the nearer term, we want to identify individuals, groups and organizations that will commit to creating a fair alternative to high interest lending by providing donations, grants, sponsorships and economic justice investments. We’ll need the support of the community to transform consumer lending and personal finance and to reach the point where we can cover most of our costs.”
BetterFi’s boots on the ground in Hamilton County, Ashley Clayton, is taking calls ahead of the nonprofit opening the doors of its Chattanooga location. Potential partners can reach Clayton with a call or text to 423 299-4033.
“If Ashley doesn’t answer, please leave a message,” Hosch urges. “By working together, I believe we can put a dent in predatory lending in Tennessee.”