Lexington, KY - With the holiday season just passed, many Americans are likely feeling the pressure of our over $800 billion of credit card debt. This debt is bad enough, but what is worse is that much of it is at rates of interest above 20 percent. Many people seem to have accepted such high rates as a necessary evil. Twenty percent may be evil, but it is not necessary. There is an alternative.
The solution to high rates of interest is found in consumer buying power. U.S. households spend over $3 trillion a year buying everything from groceries to jewelry. This spending power can be harnessed to create hundreds of billions of dollars of low-rate loans to replace credit card debt.
Many people are familiar with zero-percent financing for a car or a large appliance. The seller pays the interest in order to generate the sale. The question is why can't we get zero percent for everything? The reason is that most merchants don't lend, and banks don't sell consumer products, so there is no way for us to connect our borrowing with all of our shopping.
What we need is a new type of lender, one that both lends and markets consumer products. This new type of lender will organize a loyal group of consumers, direct the consumers to merchants that pay the lender a commission for delivering sales, and pass a portion of the commission to the consumer in the form of zero-percent interest. The zero-percent rate this lender will charge is permanent; it won't turn into
20 percent later. The burden of interest will be shifted from the household to the
merchant.
The large-scale use of zero-percent loans will grow the economy by improving the financial health of consumers, reducing bankruptcies and increasing freedom of choice. A dollar of interest has a different economic impact than a dollar of commissions. Interest for individuals is bad. High rates of interest can bankrupt families and create fear and stress in homes. But commissions paid by merchants are good. A merchant is free to make a business decision as to whether to pay such a commission in order to grow sales.
What about banks? Banks are not the best lenders to consumers. There is no better proof for this than the fact that banks have persisted for decades in lending to consumers at over 20 percent without offering a better alternative. One reason for this is that banks are regulated primarily to protect their depositors, which restricts innovation that would improve loans for consumers. Another reason is that banks don't have an economic reason to lend at a lower rate. This business is very profitable. Banks expect tens of thousands of households to default each year, but with millions of families paying interest at 20 percent, there is plenty of revenue to cover the loss.
It is time for a new, non-bank consumer-lending model. This solution is completely in consumers' control. Consumers should stop borrowing from any lender that charges 20 percent and borrow only where they are able to leverage their buying power with borrower-friendly lenders.
We have gone too long accepting 20-percent interest and this has led to thousands of unnecessary bankruptcies. Let's end this now.
Shane Hadden is the founder and CEO of Float, a new consumer-lending company based in Lexington (www.floatmoney.com). He can be reached at shadden@floatmoney.com or 859-226-0230.