Go into debt to pay rent? California startup finances your rent with high-interest loans Some critics worry it could make tenants’ troubles worse By Marisa Kendall | mkendall@bayareanewsgroup.com | Bay Area News Group PUBLISHED: January 29, 2019 at 6:00 am | UPDATED: January 29, 2019 at 6:49 am As soaring prices leave many Bay Area residents struggling to pay rent, one startup is offering an innovative but controversial option for tenants in a bind — finance your rent with a high-interest loan. Santa Monica-based Domuso allows some local renters to take out six or 12-month loans at an average annual interest rate of 27 percent to avoid paying late fees to their landlords or risk losing their homes. The service is for tenants unable to cover hefty one-time move-in expenses like security deposits and first and last month’s rent, or who fall behind on a monthly rent payment because of an unexpected sickness, layoff, or other financial emergency. “There’s a very high percentage of people … that are paycheck-to-paycheck,” said Domuso co-founder and COO Michael Lightfoot, “and there’s very little room when it comes to bumps in that financial road.” Domuso’s loan model is making some experts uncomfortable. Financing rental payments like a car or a house, especially with a 27 percent interest rate — higher than the national credit card average of 17.5 percent — could end up plunging a tenant into a deep hole of debt. “It seems like another predatory scam, and a distraction from the real problem of obscene rents,” Kristi Laughlin, senior campaign director for the East Bay Alliance for a Sustainable Economy, wrote in an email. But Lightfoot maintains his loans help renters, as opposed to taking advantage. “We have no intent of going down a path of payday lending, or anything in that regard,” he said. Domuso partners with companies that manage large, multi-family buildings in California, Arizona, Utah and Colorado. Once a deal is reached, tenants of those buildings must use the Domuso platform to pay their rent — they can use the mobile app to pay directly from their bank account, use a credit card, deposit cash via MoneyGram or set up a loan. Most options come with a “convenience fee,” which varies depending on the property and type of transaction. Users who pay via their bank account, for example, are charged fees of up to $1.99. Domuso — which got its name from the Latin root “domus,” meaning home — began offering loans for rent payments in Southern California two years ago, and expanded the service to Northern California about six months ago. So far the company offers the option to a few thousand households in Fremont, Monterey and Sacramento, and has plans to expand. “We’re really just getting started,” Lightfoot said. Domuso currently accepts about 30 percent of tenants who apply for a loan, rejecting those who don’t pass the company’s credit check. Lightfoot hopes eventually to extend the company’s services to renters with poorer credit, without adding huge increases to the company’s interest rates. Domuso interest rates fluctuate depending on the borrower’s credit, and can go as low as 18 percent in California. The interest rate is an annual figure, so renters who pay off their loans more quickly end up paying less, Lightfoot said. Still, Serena Laws, a political science professor at Trinity College who studies bankruptcy and debt, called the Domuso loan model “really troubling.” Laws pointed to Domuso’s high interest rate as a red flag. Nationally, the average credit card interest rate is 17.51 percent, according to CreditCards.com, which publishes weekly rate reports. Domuso says its average rate is higher because its borrowers tend to have poorer credit than the national average. But Stanford finance professor Jonathan Berk said the Domuso platform seems like a good thing. The reason is simple: “If you have the loan, you can stay in your house,” he said. Berk compared the Domuso loans to payday advances — which typically charge high interest rates and often get criticized as being predatory — though Lightfoot is quick to draw a line between his company and payday lenders. “It’s too easy to look to the interest rates, which are enormously high, and say people are being ripped off,” Berk said. But the data shows “people tend to use it in cases of emergency. So if they don’t use it, things can spiral out of control.” Without high interest rates, such loans would not be profitable and would cease to exist, Berk said. There are other local programs that offer emergency funds to renters without the pay-back requirement. Housing Trust Silicon Valley, for example, provides grants of up to $2,500 to cover the security deposit for a family moving into a new home. Using credit for rental payments is not a new concept, Lightfoot said. Between 2 and 5 percent of residents pay rent using credit cards, according to Domuso’s data. “This isn’t something that we’re trying to convince people to do,” Lightfoot said. “It’s something they’re already doing. We’re just giving them a safe alternative that is digital.” Most credit card companies charge transaction fees, which landlords often pass on to tenants, Lightfoot said. Other landlords don’t accept credit cards at all. Related Articles How a new kind of home-sharing startup wants to create more affordable Bay Area housing Microsoft pledged $500 million for housing. Now what will Silicon Valley tech do? World’s largest dorm-style ‘co-living’ apartment building coming to San Jose Domuso addresses an obvious need, but not in the best way, said Mathew Reed, policy manager for affordable housing advocacy organization SV@Home. There are families all over the state who are one unexpected bill away from falling behind on rent — a predicament that can force them to look for payday advances, borrow from friends and family, take on second jobs or even cut back on food and medicine in order to make their rent payments. “I think we should all be concerned,” Reed said, “that the best options we can offer people are super high-interest loans.”
I don't see how it is "predatory". No one is forcing anyone to go into debt. Stupid? Yeah. I've seen credit cards with comparable rates. I wonder how he is getting around CA usury law that caps rates at 10% https://wallethub.com/edu/usury-laws/25568/
This smells like a scam. Contrary to popular belief, credit card companies don’t make money on interest charges. They make their money on the discount rate they charge vendors. If you aren’t paying your bills on time then you are a dangerous consumer to them.