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The words “car title loan” aren’t usually associated with positive social impact. The industry offers predominantly low-income borrowers quick cash, using their vehicle’s title as collateral – which can provide an important financial lifeline when money gets tight. But with their high (and often hidden) fees and interest rates of up to 300 percent, these lenders tend to push clients even deeper into debt – often repossessing their cars and leaving them without their only remaining asset in the process.

Finova Financial, a Florida-based startup, hopes to change that image and disrupt the $5.3 billion emergency cash lending industry. Its mission is to help the over 70 million unbanked and under-banked people in the U.S. access fairly priced loans, while improving their credit scores and getting out of debt. It hopes to do this through a cloud-based auto title lending platform that reduces consumer costs, and borrower-friendly repayment terms. Its efforts recently got a $52.5 million boost, in the form of what it described as “one of the largest initial rounds in fintech industry history.”

We interviewed Greg Keough, Finova’s CEO, via email, about the company’s unique approach and the challenges of bringing a social focus to an industry best known for its predatory tactics.

James Militzer: What are Finova Financial’s business and social missions? Why did you decide to take this dual focus, and why cater to low-income customers?

Greg Keough: Finova has started a social-impact movement to turn the emergency cash lending industry on its ear by reinventing the title loan industry. We give consumers a fair, friendly alternative to the brutality of the auto title loan industry by offering reasonable interest rates and repayment periods. With Finova’s loans, it’s easier for consumers to stay on top of payments while actually improving their credit standing.

JM: Talk about the emergency cash lending industry: Why is it both ripe for disruption, and a good target for a socially-focused company (ie: what is the industry currently doing wrong in the way it approaches low-income customers)?

GK: There’s a $138 billion-dollar crisis happening right now, and its victims are the 70 million financially underserved, hardworking Americans facing a temporary cash shortage. Almost half of all Americans can’t cover a $400 emergency expense without borrowing money or selling something, and 28 percent of Americans are unbanked or underbanked, so they turn to short-term loan services like auto loan title lenders.

Unfortunately, all title equity loans are 30-day debt traps that create more financial emergencies and hardship by charging brutal interest rates — often exceeding 300 percent — plus additional fees and penalties for extensions. The terms are structured to punish consumers, virtually guaranteeing that it will take, on average, 8 months to repay that “30-day” loan. And the fees and interest will far outstrip the original loan amount.

These are the people who can least afford to pay such damaging rates, yet the industry has created a vicious cycle of financial need and indebtedness.

JM: Describe Finova’s lending platform – how does it work, and why are you confident that you will avoid the industry’s worst tendencies?

GK: Finova is the first online and mobile-based auto title lending platform. That means that our loans can be accessed at any time, from anywhere. Borrowers don’t have to take time off of work, travel to a storefront lender, and endure a long, grueling loan application process.

It also means that we operate with a lot less overhead than brick-and-mortar title loan companies. We don’t spend money on costly storefronts that eat up 66 percent of revenue. So Finova is able to offer borrowers much lower costs – 70 percent lower than the national average. We don’t want to be in the business of repossessing and liquidating our clients’ vehicles. We want them to succeed – it’s a better business model for us as well as them. That’s why Finova’s C-LOC is a totally new and different type of title loan, designed to solve the problem of the 30-day debt trap. We even offer an ongoing line of credit when needed in the future after successful repayment of the original loan.

Our ultimate goal is to help clients in the short term with their urgent financial need as well as in the long term by helping them establish or rebuild good credit.

To that end, our interest rates average about 30 percent, compared to the typical title loan interest rate of 300 percent. Our C-LOC (car equity line of credit) loans have a 12-month repayment structure, which is unique in the title lending industry. We give our borrowers a 10-day payment grace period with no penalty, which helps reduce the likelihood of incurring additional fees. And a portion of every payment goes toward the loan principal, further helping ensure that borrowers won’t default on their loans or need costly extensions. Because of this structure, it would be impossible for one of our borrowers to be eight months into their payments and still owe the entire principal, which is often the case with traditional title loans since they are structured to do exactly that—to keep the borrower in debt.

JM: Under what circumstances, if any, do you actually have to take possession of a defaulting customer’s car, and what measures do you take to avoid that, or to help customers recover from it?

GK: Finova’s secure online screening process is streamlined and designed for speed and accuracy. Our proprietary algorithms estimate vehicle value, access title documents, search for liens, and review other information to minimize risk.

Finova loans are secured by the title to the vehicle at a loan-to-value ratio that is under the current value of the vehicle, to mitigate risk. The vehicle serves as collateral in the event of default, and failure to pay allows Finova to prevent registration renewal. However, Finova works with every client to try avoid defaulting, losing their vehicle, and damaging their future creditworthiness.

JM: Talk about Finova’s recent $52 million VC funding round – why do you think investors responded so favorably, and what do you plan to do with the investment?

GK: Finova’s unified back office and mobile-leveraged tech platform capitalize on an existing $5 billion market that is growing nearly 10 percent a year. We invented the C-LOC (car equity line of credit) to solve the title loan problem with a completely different approach, loans uniquely positioning us to capture a significant share of the 2 million consumers who spend $5.3 billion annually on traditional title loans.

The underserved consumer base has grown 9 percent per year since 2011, and 26 million Americans are “credit invisible.” That’s a whopping 1 in 10 adult Americans who do not have a credit history with a nationwide consumer credit reporting agency.

I think our investors responded so well to our approach because it’s designed to provide a pathway to financial health and help make the credit invisible “visible.” They like to get in on the ground floor of an offering that promises to disrupt an industry, and they like that Finova offers the first positive experience with a lender that most of our clients have ever had.

As Sheel Mohnot, partner at 500 Startups (an investor in Finova) told The Wall Street Journal: “My investment thesis is: financial services for the rest of us. There could not be a better fit (than Finova) for working with a population who is unbanked.”

JM: I understand you’re currently lending only in Florida – how long until you’re able to expand beyond the state, and what states are you targeting next? 

GK: We are currently working with regulators in other states and expect to be expanding our offering this year.

JM: Where would you like to see the company in five years? In 10?

GK: The C-LOC loan offering is the first of a full menu of digital financial services products we plan to offer to the millions of consumers outside the formal financial system who are seeking financial solutions that fit their needs and lifestyle. We are building the digital bank of the future for the 28 percent of Americans who are outside of the traditional banking system.

Photo credit: Jeremy Brooks, via Flickr. Homepage photo credit: Allen, via Flickr.

James Militzer is NextBillion’s senior editor.