Make a bad investment? You’re only going to lose the money you put down. Sign a shoddy loan agreement? You may end up in bottomless debt.
For thousands of New York taxi drivers, however, both ended up being the case. According to a New York Times expose published this spring, much of the profession’s financial ruin – and, tragically, rampant suicide rates – can be traced to the deliberate overpricing of taxi medallions (the city’s taxi license) and the predatory loans cabbies took out to afford them.
There’s little argument that the taxi drivers weren’t taken advantage of, with many lacking the English language skills to do their due diligence. The problem is that not all predatory loans are unlawful loans. While usury laws can cap interest rates and payday loans are outright banned in some states, many unethical lenders are still able to operate within the realm of legality.
Failing to read the fine print of a loan agreement can have life-altering consequences. If you’re a small business owner who has been approved for a business loan, the hard part may be over, but don’t let your jubilance get the best of you. Read the fine print.
You’ll know you’ve been thorough if you can answer these seven questions:
1. Is the interest rate fixed or variable?
In a variable interest rate loan, the borrower pays the market’s interest rate plus or minus a fixed percentage. A variable rate commonly seen in business loans is the Wall Street Journal Prime Rate plus 2.5%. As the prime rate changes, so does the interest a borrower pays.
A fixed interest rate, however, is not affected by the market – the percentage remains the same. Variable rates tend to accrue less interest than fixed rates, however, this comes with greater risk, especially for loans with long amortization periods. A fixed interest rate secured when interest rates are low can shield borrowers from market changes.
Look out for interest-only loans. In a standard amortizing loan, borrowers pay off a bit of their principal, or the amount initially borrowed, in addition to interest for each installment. An interest-only loan, on the other hand, is exactly what it sounds like – but it doesn’t last forever. After the interest-only period, borrowers can either convert to a standard amortizing loan, pay off the whole debt in one balloon payment or refinance. [Interested in finding the right business loan for your small business? Check out our best picks and reviews.]
The advantage of interest-only loans, for those willing to take the risk, is that the initial required payments are lower – this can be a lifesaver for a cash-strapped small business. As with any other risky lending practice, however, they can also be used by predatory lenders to mislead inexperienced borrowers. Indeed, this was one of the many schemes The New York Times reported were used against taxi drivers, by leading borrowers to think they were slowly paying off their debts when they were only paying interest.
2. What is the annual percentage yield?
The annual percentage rate (APR), a combination of the total interest payable and all other fees averaged out over the term of the loan, provides a useful way to evaluate and compare loans with one quick figure. What APRs don’t factor for, however, is compounding interest, which is why borrowers should look at the annual percentage yield (APY), or earned annual rate (EAR), for a more accurate read on what they’ll have to pay. This is because unlike APR, which multiplies the interest rate by the number of times it’s applied (e.g., quarterly or monthly), the APY includes compound interest, or interest paid on previous interest.
Since APYs are higher – not to mention much harder to conceptualize – they’re less likely to be quoted by lenders. If that’s the case, borrowers can use this online calculator instead.
Look out for factor rates. It’s common for short-term loans or merchant cash advances to quote interest in the form of a factor rate – this is not to be confused with APR. While APR reflects interest charged on the remaining principal – meaning the more debt you chip away, the less interest you’ll owe – factor rates reflect interest for the entire principal, regardless of the number of installments or how quickly it’s paid off. Thus, a factor rate will accrue more interest than an APR of the same percentage.
That’s something Glenn Read learned the hard way when financing his small business, Allegra Marketing Print Mail, after being turned down for a traditional bank loan.
“I was forced to take out merchant cash advances (MCAs) and high-interest line of credit loans just to meet payroll and keep the lights on,” said Read. “One of the first MCAs I took out, the amount I was given was $40,000 and the payback was $56,000 for a one-year term.” As it happened, the merchant cash advance had charged a factor rate of 40%.
3. Whose credit rating is important?
“It’s important to understand the language of the nonbank lenders,” said Read. Whose credit rating is it based on?
A business loan is often based on a combination of both business and personal credit scores. For small businesses yet to prove creditworthiness, the owner’s personal credit score is especially critical.
“Few small businesses have a long enough track record to have a sufficient credit history,” said Brian Cairns, who runs his own consulting company ProStrategix Consulting Inc. After securing his own small business loan, Cairns now helps many of his clients do the same.
According to Cairns, personal credit concerns not just the founder, but any equity-holding partner. “If you or one of your partners owns a material part of the business (usually about 20% or more), your personal credit can affect your chances of getting a small business loan,” Cairns said.
Look out for unjustified risk-based pricing. A subprime loan, or a loan given to a borrower with a poor credit history, will often pay a risk premium of either higher interest rates, higher fees or both. Some predatory lenders take advantage of this reality by telling the borrower they have bad credit to ramp up interest rates, a practice known as unjustified risk-based pricing. This is an easy trap for inexperienced borrowers unaware of their own creditworthiness. Thus, an awareness of your personal and business credit rating can help you make sure you’re getting a fair price.
4. Do you have to put up collateral?
A secured loan means that the borrower must offer some sort of asset as collateral, or something that can be taken over by the lender in case of default. In mortgages, this is the property itself. An unsecured loan does not include any collateral.
While credit cards and student loans are common examples of unsecured loans, business loans will almost always require some sort of guarantee. Only well-established companies with long credit histories will stand a chance of getting an unsecured business loan.
Look out for personal guarantees. It’s common for small business loans to include a personal guarantee for the same reason personal credit scores come into play – many small businesses have yet to build creditworthiness on their own, making the owner liable instead. On top of that, small businesses may be lacking in assets that can be used as collateral. However, banks may not always be upfront about this.
“Most people don’t read the fine print and can be surprised when they learn that they put some of their personal finances at risk,” Cairns said.
The assertion comes from personal experience. “We caught it in our fine print that the bank was using our founders’ personal retirement savings as a personal guarantee for the loan.”
5. What is the payment and amortization schedule?
Interest rates and APR aside, business loans can also vary by payment schedule. This includes not just the number of payment periods per year, but the inclusion of grace periods, late payment fees and prepayment penalties.
One thing lenders don’t often explicitly specify in the fine print is the amortization schedule, or the schedule of how much of the debt is repaid each month. Remember that in each installment, some of the money a borrower is charged pays off the principal, or the amount of money they were initially lent, and some of it is paying off the interest, which can be seen as a fee for the lender’s services. As a loan reaches maturity, the proportion of each installment paid toward principal increases while the proportion paid toward interest decreases.
The difference between an amortization schedule and a payment schedule is that with the latter, the amount of principal and interest owed each installment is added together into one total amount charged. An amortization schedule, meanwhile, lets borrowers see the exact breakdown, showing how much debt they still hold at any given time during the life of the loan.
It’s important for borrowers to know where they stand with their debts, as these can affect their credit rating. A savvy borrower can also use the amortization rate to calculate how much they’d save in interest by paying off their loan early. Thus, borrowers are advised to plug their loan details into an online amortization calculator.
Look out for prepayment penalties. Getting penalized for paying a loan off early may sound counterintuitive, but the earlier the borrower repays the principal, the less interest they’ll have to pay over the life of the loan if it’s a standard amortizing loan. Since lenders rely on that interest to make a profit, charging a prepayment penalty can offset some of that lost future interest. The good news is that while common for mortgages, prepayment penalties are rarely included in small business loans.
6. What is the lender’s definition of default on payments?
Some borrowers will hang on to the fine print word for word, only to give a cursory glance to the part about defaulting – no one wants to entertain that possibility. What they don’t know is that some lenders may have strict interpretations of what it means to default, creating expensive mistakes down the line. This is why Jared Weitz, founder and CEO of small business lender United Capital Source Inc, stresses the importance of doing your homework.
“One piece of language and content to look out for is the time period allowed to make amends after receiving a default notice,” said Weitz. “If you read this prior to signing and default your loan, you will already know what to do and how quickly it must be done.”
There are some instances in which a borrower can pay on time and still go into technical default. This is a result of violating other terms of the loan, such as failing to provide tax returns or taking on additional debt.
Look out for Confessions of Judgment. A Confession of Judgment (COJ), or cognovit vote, is a written agreement signed by the borrower that forfeits their rights to dispute any actions taken by the lender upon default. This means that if a borrower defaults, the lender can present the COJ in court and obtain a judgment without the borrower ever being notified, let alone given the opportunity to defend themselves.
“These days, it seems the No. 1 predatory lending scheme that SMBs are prone to is the use and misuse of Confessions of Judgement,” said Weitz.
According to Weitz, such predatory lenders profit by enforcing the COJ as soon as the business owner defaults before owners are even given the chance to cure the default in the time specified in the loan agreement. “These predatory lenders go into the financing agreement with the intention of default so that they can seize the business and personal assets of the business owner.”
Luckily, COJs are not a necessary evil. “There are many lenders out there that will work with you without the use of a COJ, so when shopping around make sure you mention that you will not agree to any terms that involve a COJ,” said Weitz.
7. How does the lender make money?
The best thing small business owners can do to get a fair loan agreement is to ascertain where the lender’s profits are coming from.
A fair lender should be turning most of their profit from interest rates reasonably based on the borrower’s credit history. Look out for lenders raking in profit from penalties or seized collateral, however. If the lender earns more money that way than from interest, then they’ll be incentivized to reverse engineer loan agreements to force borrowers into default. Indeed, this is exactly how many predatory lending schemes are conceived – which is why no borrower should enter a contract in which the lender profits from their failure.
It’s unlikely that your lender is going to let you read their income statement, but such loans are usually made obvious by the too-good-to-be-true interest rates, excessive fees and lack of any grace period. You can also look up your lender’s rating on the Better Business Bureau.
The takeaway is not that some loan terms are bad and should never sign the agreement. The takeaway is that you should never sign a loan agreement until you understand every term in the fine print. Do not hesitate to consult a lawyer if that’s what it takes.
Many of the same terms used in predatory lending schemes are also effective financing tools for borrowers willing to take a bit of risk, as long as they know what they’re signing onto. By that same token, lenders deemed safe may still include unexpected terms and conditions that end up ruining borrowers who didn’t do their due diligence. In conclusion, read the fine print!
Uber And Lyft Drivers Slow Down NYC Traffic To Protest App Changes
Traffic was backed up on the Brooklyn Bridge and FDR Drive on Tuesday when hundreds of Uber and Lyft drivers conducted a “slow vehicle procession” toward Gracie Mansion to protest new changes to the companies’ apps. Drivers are arguing that the companies are preventing them from earning a living—and want the Mayor and City Council to step in.
According to the Independent Drivers Guild, “Starting on Tuesday Uber will enact new policies to kick drivers off the apps between trips and in areas of lower demand in order to avoid paying drivers as required by New York City’s pay regulations. Lyft enacted a similar policy earlier this summer to protests from the Drivers Guild. The New York City Taxi and Limousine Commission has failed to take action, so the Drivers Guild is calling for the Mayor and City Council to stop the apps from violating the pay rules in an attempt to scam drivers out of fair pay.”
In June, Lyft changed its policy to comply with minimum-wage laws. As Crain’s explained it, “The new payment formula looks at how much of the time a driver cruises with an empty car. The more cruising a driver does, the more fare revenue the app-based company needs to share to ensure the driver makes at least $17 an hour after expenses. App-based services with a high ‘utilization rate’—meaning their drivers are ferrying passengers nearly 60% of the time—can contribute less to the driver’s pay. To reduce congestion in Midtown the Taxi and Limousine Commission wants fewer empty cars.”
Now Uber is following suit, not that it nor Lyft want to; Lyft had filed (and then dropped) a lawsuit challenging the minimum wage rule, while Uber said in a statement on Monday, “Time and again we’ve seen Mayor (Bill) de Blasio’s TLC pass arbitrary and politically-driven rules that have unintended consequences for drivers and riders.”
The Independent Drivers Guild argued, “By logging drivers off the app and requiring them to travel to an area of higher demand in order to pick up their next trip, Lyft would be shifting the costs of travel and waiting time onto the drivers and in so doing, violate this commission’s rules.”
NYC’s own yellow cab industry is in crisis, in part because of increased competition from the app-based services. The IDG has asked for a Drivers’ Bill of Rights, which would prevent the apps from deactivating drivers without a stated cause, among other guarantees.
Uber to limit drivers’ app access to comply with NYC regulation
Uber on Tuesday will begin limiting drivers’ access to its app in New York City to comply with regulation aimed at boosting drivers’ pay and easing congestion in Manhattan, laws that Uber says will have unintended consequences.
Uber Technologies Inc’s move to lock out drivers at times and in areas of low demand comes just months after rival Lyft Inc implemented similar measures in response to city regulation.
Both companies oppose the unprecedented rules, saying they will prevent drivers from earning money and cut off low-income New Yorkers in remote areas not serviced by regular taxis, a claim the city rejects.
“Time and again we’ve seen Mayor (Bill) de Blasio’s TLC pass arbitrary and politically-driven rules that have unintended consequences for drivers and riders,” Uber said in a statement on Monday.
New York City’s Taxi and Limousine Commission (TLC) last year implemented several laws challenging the way ride-share companies operate in North America’s largest city, one of the industry’s largest markets.
The agency’s acting commissioner, Bill Heinzen, in a statement on Monday defended the laws, saying they held companies accountable and prevented Uber and Lyft from oversaturating the market at drivers’ expense.
New rules cap the number of app-based, for-hire cars and established minimum pay for the city’s 80,000 ride-share drivers based on how much time they spend transporting passengers.
The laws also limit the time drivers spend “cruising” – driving to or waiting to pick up new passengers. Starting in February, ride-share companies have to reduce cruising rates by 5% and later by 10%, down from currently 41%. Non-compliance can result in fines or even the inability to operate in the city.
The rules are aimed at reducing congestion in Manhattan, where ride-share vehicles make up close to a third of peak time traffic, according to the TLC.
Uber said there was no evidence showing the steps would ease congestion. The company supported a $2.75 congestion surcharge implemented for Manhattan ride-share trips earlier this year.
Lyft in June changed its app to lock out drivers during low demand. The company said it supports drivers during the change, for example by showing them areas with high demand or times during which restrictions are lifted.
The New York Taxi Workers Alliance, a union representing taxi and app-based drivers, said the companies were trying to scare drivers.
“Uber is now spreading fear and disinformation to New York drivers, attempting to convince workers that rules protecting their livelihoods are to blame for Uber’s greedy policies,” the union said in a statement.
Plans for Melbourne’s flying taxi service get serious as Uber Air head appointed
Uber has announced the appointment of Natalie Malligan as the new head of Uber Air for Australia, charged with getting the company’s flying taxi service off the ground in Melbourne.
Announcing the appointment in a blog post late Monday, Uber Australia said Malligan will be responsible for making Uber’s ambitious urban aviation plans a reality, working alongside the Victorian government, Melbourne Airport, federal aviation agencies, and Melbourne communities.
Uber Air has been touted by the company as an “urban aviation ride-sharing product”, which it hopes will ease traffic congestion on the ground.
Melbourne in June was announced as the third pilot city for Uber to trial Uber Air, and the first outside of the United States.
Test flights have been pencilled in for next year, with plans for commercial operations to commence from 2023.
“In the long term, the vision is for safe, quiet electric vehicles transporting tens of thousands of people across cities for the same price as an UberX trip over the same distance,” Uber said in a statement when announcing the initiative down under.
The company in August last year announced five possible markets to launch its pipedream: Australia, Brazil, France, India, and Japan. It also confirmed that from 2023, customers will be able to get a flight on-demand in Dallas and Los Angeles.
Uber had in February told an Australian House Infrastructure, Transport and Cities Committee that it was keen to trial Uber Air in either Melbourne or Sydney and that it just needed Australian governments to work alongside the Silicon Valley darling to make that happen.
In announcing Uber Air was coming to Australia, the company announced partnerships with Macquarie, Telstra, and Westfield-operator Scentre Group, and said it would work with existing partners including Melbourne Airport to develop the infrastructure and telecommunications needed to create the aviation network.
Malligan was previously Uber’s head of cities for Australia and New Zealand.
She previously worked as a manager in Bain and Company’s Private Equity practice in San Francisco and Sydney and holds a combined Bachelor of Commerce and Law degree from the University of Sydney, and a Master of Business Administration from Columbia University in New York.
Meanwhile, Airbus is working on its own air taxi product, Vahana, with the company in July showing off a full-scale demonstrator vehicle that recently completed a full transition flight.
Vahana has undertaken more than 80 flight tests since last year, which the company said help to validate the overall design and configuration. The lessons learned from Vahana, Airbus said, will enable Airbus Urban Mobility to develop a future market-ready electric vertical take-off and landing (eVTOL) vehicle.
Airbus also has a partnership with Audi.
In the eVOTL space, there’s also competition coming from NFT with its Aska dual-purpose vehicle designed both to drive on roads and to fly through the air; Kitty Hawk, funded by Google co-founder Larry Page and led by self-driving car pioneer Sebastian Thrun; Ehang from China; Terrafugia, which hopes to sell its flying car in 2019; and AeroMobil in Slovakia, which like NFT, hopes for a hybrid flying-driving vehicle.
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