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Monday, February 5, 2007

The Worst Idea Ever

posted by on February 5 at 16:58 PM

A payday lending watchdog group has posted an interview with a man who’s made a mash-up of MySpace and payday loans. FYGO promises fair interest rates and the opportunity to borrow and lend among people you can trust: your friends! Eek! Sounds like a bad idea. Maybe instead we should borrow a page from Islamic financing, in which the risk, and the profits, are shared.

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1

Islamic finance is not some sort of progressive, non-exploitative alternative. Islamic finance products are designed to be functionally equivilent to western finance products, but couched in language that avoids the word "interest".

For example, in an "islamic mortgage", the bank pays for the house on behalf of the buyer and then charges him rent for a contractually specified time before transfering the title to him. Of course the rent and the time period correspond exactly to the terms of a market-rate western mortgage. The bank earns just as much and and buyer pays just as much. They have just played a semantic game.

Of course, payday lenders play exactly the same sort of semantic games by charging "lending fees" instead of interest. Apparently if they had dressed up their game with pseduo-progressive rhetoric about how "the risk, and the profits, are shared" Angela would be a big fan of their business models.

Posted by David Wright | February 5, 2007 5:27 PM
2

Don't ever borrow (I mean seriously borrow, not five bucks til Tuesday) from or lend to your friends, unless you want your friendship to end in tears. There are no other options.

Posted by Fnarf | February 5, 2007 5:37 PM
3

From wikipedia, on the time value of money: "The premise of time value of money is that an investor prefers to receive money today, rather than the same amount in the future, all else being equal. As a result, the investor demands interest to compensate, which may be paid periodically or at the end of the period. The interest compensates for the time in which the money could be put to productive use, the risk of default, and the risk of inflation (as well as some other more technical factors)."

Islamic finance pretends you're not paying interest by adding a middle man that buys, for example, a house on your behalf and then sells it back to you at three times the cost, but at 0% interest. And surprise, your monthly payments are the same as a plain old mortgage, plus a mark up for the middleman.

It's is like saying dividing by two is different multiplying by half. It's a joke.

Posted by mur | February 5, 2007 5:37 PM
4

What #3 said. Islamic financing, religious convictions aside, is not an economically reasonable model. It assumes that the value of money is fixed; money loaned gratis (even if paid back) is actually a gift whose value is, at the bare minimum, the total inflation incurred during the debt.

Posted by tsm | February 5, 2007 6:00 PM
5

If you want to talk about cooperative exchange systems Angela (since all current national currencies are based on the "sin" of usury), you should check out LETS, or Time banks, or WIR, or ROCS, or other local currency systems.

Posted by treacle | February 5, 2007 7:23 PM
6

Circle Lending (http://www.circlelending.com/) has gotten a lot of good press lately for structuring loans for people who know each other. They take a small cut of the interest, but let you set up personal loans like professional ones, and they apparently work very well. I guess the problem with personal/family loans is no one really takes them seriously.

Posted by John | February 5, 2007 7:34 PM
7

I'm sure you'll notice from my email that I work for FYGO, so I'm admittedly a little biased. But I wanted to make some clarifying points about the service. First of all, I can see where lending money to friends can sometimes be bad practice, I know I wouldn't lend some of my friend too much money...

FYGO is meant to be a little more that than. I'd think of it more like "LinkedIn meets PayPal". At FYGO, you create networks of people you know and trust. When you run into a short-term cash bind, instead of credit cards, or worse yet 300%+ interest rate Payday loans, you can turn to your network. You figure out terms, interest, etc. and FYGO handles the transactions. What this does is take that "awkwardness" and emotional angst associated with friends between family or friends away, not make it worse. You never have to hound someone to pay you back, and if you're the borrower you know you're steadily paying back your debt.

I'm not as familiar w/ the Islamic financing idea, but its interesting that this was brought up. The whole idea of FYGO is based on the Mexican tradition of tandas, which are offline P2P lending groups of friends and families, and have been around for centuries. FYGO is just bringing that tradition to the Internet. There are similar traditions in Asia and India.

Thanks for being patient with my extra-long comment. Check out FYGO, you might find its a better idea than it appears at first glance.

Posted by Bob | February 7, 2007 6:58 AM
8

boat loans

Posted by boat loans | February 25, 2007 6:43 PM

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