When Darin Cline, our co-founder and COO, graduated from Annapolis as an officer in the Navy, he had minimal credit history and a career full of promise. Despite his minimal history, Darin’s first loan ever – $14k – was able to be offered with a 3% interest rate. What was the key to the credit union’s confidence in making this offer? Repayment would come directly from Darin’s payroll, bypassing his checking account and the associated risk of lending. This is called a payroll loan, and it’s been around for decades. And now it’s available to anyone.
Darin’s career was better than his credit
A loan structured this way rewards consumers who have good careers, and ties the loan approval and pricing to their future employment stability rather than thin credit history or past bill payment mistakes.
Lenders can reduce pricing and expand product availability based on employment due to greater confidence that the bill will be paid on time and in full each month. After setting up the payroll allocation payment method, consumers are able to eliminate the operational complexities of paying a bill while having peace of mind that it is getting paid on time. This lowers the risk of missed payments, and money in the checking account is more reflective of money available to spend on things outside of recurring bills. For over half of the U.S. new to credit or with a non-prime credit score, this is a significant opportunity to expand access to low cost credit products.
To put it simply: this product is truly a win-win for businesses and consumers alike.
When it came time for a mortgage, Darin naturally sought another version of an easy-to-pay, low cost loan, but was greeted with laughter; the mortgage broker told him this wasn’t a thing. Why did this great product have limited availability?
An asset class primed for scale in the U.S.
To access a payroll loan in the U.S. today, you must be an employee of a company that offers this as a benefit, or a member of a credit union or mutual organization that has a relationship with your employer.
Payroll loans in the U.S. started as direct employer-to-employee loans, but this solution produced significant limitations. Employers were difficult to manage, limited by their own funding capacity and had significant potential for employer/employee conflict issues.
Employer-specific credit unions stepped in to make the loans to members, reducing the operational challenges on the employers. The military is by far the biggest example, but notable names such as GE and Johns Hopkins have sizable credit unions with payroll payments as well. While certain entities were able to offer this benefit, the population as a whole remained largely unable to access this type of loan.
A series of startups have emerged (e.g., FinFit, TrueConnect, Salary Finance) that have tried to scale the number of employers able to offer this benefit by servicing multiple employers within one platform and credit portfolio. This greatly expanded the range of employers that could offer this program, but adoption by employers has been challenging. There isn’t an urgent need for companies to offer it as a benefit, unlike Early Wage Access programs where employees were skipping shifts to other options that got them paid the same day.
These loans are superior because of how well automated the payments are, not because of an affinity for their employer. A better distribution method would remove employers from the equation entirely, empowering consumers to directly control their payments from income. We believe that is how the next evolution of payroll loans will scale.
Darin would agree, so much so that it’s a fundamental part of why he joined in founding Highline. By obtaining permissioned access from a consumer to their payroll platform, payroll loans can exist at scale and for a greater variety of use cases. While Highline won’t make the loans, we’re building the payments rails to make this accessible to everyone.
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