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Payday Loan Business > Offshore Model > Consumer Lending

Offshore Payday Loan Model

Offshore Payday Loan and Consumer Loan Company. The Alternative Financial Services (AFS) industry, typically referred to as payday loans, short term non-collateralized loans, various forms of installment lending, etc., continues to evolve from both a regulatory and an operational perspective.

In the early days, many Lenders operated under what was referred to as a "bank rate exportation model" and funded loans to residents of virtually all states. These payday loan lenders literally exported usury rates across state lines much like credit card companies do. When federal bank regulators modified the reserve requrements, payday loan lenders began to explore alternative approaches for meeting consumer demand for their products and services.

As regulations changed, so did the payday loan operational model. Driven by the thirst consumers have for short-term loans to solve temporary financial challenges, Lenders scrambled to employ creative approaches to meet this continuing demand.

Many payday loan Internet lenders have migrated to the "choice of law" model, exporting the usury rate of the state the Lender is licensed in to the state in which their customer resides. This approach is controversial and is being challenged in the courts. State regulators debate this strategy with payday loan legal and compliance counsel regularly. To our knowledge, no federal courts have yet decided this issue. But there are certainly more than a few state courts, Pennsylvania and New York for example, that have decided in favor of a state attorney general's right to put payday loan Internet Lenders out of business when they lack the appropriate state license.

Note: Payday loans, car title loans, installment loans, line-of-credit loans... the business of lending money to the masses; these emergency financial products are all lumped into this conversation.

Other Internet Lenders have implemented the "state by state" licensing model. They obtain a license in each state they want to service. The challenge with this model is that several states don't have favorable legislation allowing an online Lender to achieve their profit goals. Additionally, it's expensive and time consuming to apply for and receive a consumer loan license for each state a Lender chooses to operate in.

Internet Lenders needed to find a better solution!

Internet Lenders realize they need a long term, reliable model that enables them to earn a profit, meet the product demands of their customers, and navigate the uncertainty of future state and federal regulation.

And so the "Offshore Loan Model." was created!

A Lender creates, or invests in, an offshore corporation, typically an IBC in a country having favorable loan or short term lending regulations. Through their relationships with banks and other supporting vendors, they lend to customers in the US and/or Canada, Australia, the UK, etc. thus exporting the allowable rates and rollover rules from that offshore location. Some of the more common countries for doing this are Belize, Costa Rica, Turks and Cacaos and the US Virgin Islands.

Of course, once an offshore Lender has a corporate structure in place by using competent legal counsel, there are other other issues to address. The general opinion of both experienced legal counsel and Lenders is that ideally, you'll have as many pieces of this puzzle offshore as is practical. This would include your call center operations, server hosting facility, and more.

With the help of the right resources, all of this can be accomplished relatively easily and quickly. The total setup time is typically 2-3 months. Cost varies depending on your legal counsel. For the entire process, including corporate setup and call center services setup, a Lender can expect costs to range from $30,000 (US). The right resource can help, not only with these items, but also with 3rd party vendor relationships such as ACH providers, credit bureaus, lead providers, collections, ID validators and consulting with you as your portfolio grows.

As with any loan portfolio, domestic or offshore, the resources you choose to work with will have a tremendous impact on your portfolio's performance and velocity for achieving profitability. A complete understanding of the industry is crucial as is the knowledge required to analyize a portfolio's performance based on underwriting, payday loan lead quality, the amount of capital you've invested, etc.

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