The Straight Dope

Go Back   Straight Dope Message Board > Main > Great Debates

Reply
 
Thread Tools Display Modes
  #1  
Old 10-06-2007, 11:40 AM
bob_co bob_co is offline
Guest
 
Join Date: Jul 2007
Why don't payday loans violate usury laws? [ed.]

In recent news, I saw that on Oct 1, it became illegal to loan money to a member of the US armed services at more than %36 APR.

My girlfriend is in the car title / payday loan business. She received a memo from corporate stating that they will risk a jail term if they do not have a waiver in every loan they make stating that the debtor is not in military service nor related to anyone that is.

In the last 5 or 10 years, I’ve noticed that short term loan / high risk loan business is on just about every street corner. Just like we’ve noticed the difference in banking in retrospect after reading how the bank branch laws have changed on TSD. I also distinctly recall in the distant past that there was a state district attorney crack down on lease-back non-loans as being against the law because they were circumventing the maximum interest rates allowed.

What happened to the laws on interest rates? Are they gone?

In relation to this question, is there still a law about the speculative nature of a loan? ie. A minimum down payment? Or is that just for cars and houses, not cash?
Reply With Quote
Advertisements  
  #2  
Old 10-06-2007, 11:56 AM
Harmonious Discord Harmonious Discord is offline
Guest
 
Join Date: Apr 1999
I believe Reagan removed the 18% limit that was on loans.
Reply With Quote
  #3  
Old 10-06-2007, 12:02 PM
bob_co bob_co is offline
Guest
 
Join Date: Jul 2007
I seem to recal a %100 or %125 limit for many years.

Another interesting note is that members of the military have always needed permission from their commanding officer before applying for a loan.
Reply With Quote
  #4  
Old 10-06-2007, 12:45 PM
Joey P Joey P is online now
Charter Member
 
Join Date: Jun 1999
Location: Milwaukee, WI
Posts: 21,642
Quote:
Originally Posted by bob_co
I seem to recal a %100 or %125 limit for many years.

Another interesting note is that members of the military have always needed permission from their commanding officer before applying for a loan.

My wife, for some stupid reason, decided to use BillMeLater, if you miss the payment on that, it's something like 141% interest.
Reply With Quote
  #5  
Old 10-06-2007, 01:01 PM
bob_co bob_co is offline
Guest
 
Join Date: Jul 2007
The average payday loan is %500 and the avage car title loan is %300.

I pulled those figues out my A$$ but I have inside info.

The break even point for a two week $100 payday loan is $11.75. Thats %305.5 APR.

Another note is that loan sharking is defined as illegal. Forgive the thread title. The OP question is what the usury laws are.
Reply With Quote
  #6  
Old 10-06-2007, 01:06 PM
jtgain jtgain is offline
Guest
 
Join Date: Jul 2007
Burns (to Homer): Are you familiar with this state's harsh usury laws?
Homer: What?
Burns: Oh, nothing. That a silly word I just made up. Sign here..
Reply With Quote
  #7  
Old 10-06-2007, 01:06 PM
Duckster Duckster is offline
Charter Member
 
Join Date: Aug 2001
Posts: 12,927
This article about loan sharking, err payday loans, is from 1998.
Reply With Quote
  #8  
Old 10-06-2007, 01:14 PM
PatriotX PatriotX is offline
Charter Member
 
Join Date: Jan 2003
Location: Fayettenam
Posts: 6,820
Quote:
Originally Posted by bob_co
Another note is that loan sharking is defined as illegal. Forgive the thread title. The OP question is what the usury laws are.
Whats the difference?

http://www.investorwords.com/5639/loan_sharking.html
http://en.wikipedia.org/wiki/Loan_shark
Reply With Quote
  #9  
Old 10-06-2007, 01:32 PM
bob_co bob_co is offline
Guest
 
Join Date: Jul 2007
Quote:
Originally Posted by PatriotX

The title shoud be
When did high interiest rate loans become leagal in the US? and what are your local laws on usury?

Loan sharking by definition has never been leagal.
Reply With Quote
  #10  
Old 10-06-2007, 01:45 PM
Tristan Tristan is offline
Guest
 
Join Date: Sep 2000
I can almost guarantee that this law has been made in response to the existance of CashCall, who prey on those that are fiscally irresponsible... they use the same laws that allow a "Cash and Go" type place exist, but for much MUCH larger sums of money. This enable them to charge, for example, 58% interest on loan (such as mine) or even higher (83%, in the case of my brother, whom was National Guard at the time).
Reply With Quote
  #11  
Old 10-06-2007, 04:51 PM
Wee Bairn Wee Bairn is offline
BANNED
 
Join Date: Apr 2006
Location: Biafra
Posts: 5,734
As an aside, if Judge Marilyn's rulings on People's Court can be trusted, in some states if you loan a person money with an excessive interest rate, not only do they not have to pay the illegal interest, they also do not have to pay back the original loan amouunt.

I think I read once that rent-a-center places and payday loan places are legally allowed to exceed the rate maximums.

Last edited by Wee Bairn; 10-06-2007 at 04:53 PM..
Reply With Quote
  #12  
Old 10-06-2007, 06:37 PM
shelbo shelbo is offline
Guest
 
Join Date: Aug 2000
The usury laws still exist, and have dramatic penalties. In CA, if you make a usurious (sp?) loan, you need to pay back all the interest times 3 (IIRC).
The law has many, many exceptions however - basically any company in the business of making loans, with a California lender's license, is exempt. So all your finance companies, credit card companies, etc. can charge what they want without violating the usury law. If you loan money to your brother in law, however, at a similar interest rate, he can hit you up for a penalty.
Reply With Quote
  #13  
Old 10-06-2007, 09:20 PM
PaulParkhead PaulParkhead is online now
Guest
 
Join Date: Jul 2007
Why are US military personnel protected from these dubious practices when the rest of us are not?
Reply With Quote
  #14  
Old 10-06-2007, 10:16 PM
alphaboi867 alphaboi867 is offline
Member
 
Join Date: Feb 2005
Location: the Keystone State
Posts: 11,303
Quote:
Originally Posted by PaulParkhead
Why are US military personnel protected from these dubious practices when the rest of us are not?
Because they're expected to devote all their thoughts and efforts to the defence of the nation without having to worry about problems at home. Any civil proceedings (including foreclosures, evictions, divorce) are suspended while they're on active duty. It's called the Servicemembers' Civil Relief Act and the idea dates to the Civil War
__________________
No Gods, No Masters
Reply With Quote
  #15  
Old 10-06-2007, 10:44 PM
What Exit? What Exit? is online now
Member
 
Join Date: Jun 2005
Location: Central NJ (near Bree)
Posts: 25,608
Quote:
Originally Posted by bob_co
...
Another interesting note is that members of the military have always needed permission from their commanding officer before applying for a loan.
This does not sound correct. I got a small loan from the on-base Naval credit union and no permission from my CO was required. Even if I was ignorant of the reg, I doubt the loan officer would have been.

I have to ask for a cite on this please.

Jim
Reply With Quote
  #16  
Old 10-07-2007, 01:37 AM
Cluricaun Cluricaun is offline
Guest
 
Join Date: Apr 2003
Quote:
Originally Posted by What Exit?
This does not sound correct. I got a small loan from the on-base Naval credit union and no permission from my CO was required. Even if I was ignorant of the reg, I doubt the loan officer would have been.

I have to ask for a cite on this please.

Jim
I'm going to go with What Exit? on this one. As a family member of two current duty Marines, this sounds like something that a CO might tell you, but in reality isn't true.
Reply With Quote
  #17  
Old 10-07-2007, 05:24 AM
Raguleader Raguleader is offline
Guest
 
Join Date: Mar 2003
Quote:
Originally Posted by What Exit?
This does not sound correct. I got a small loan from the on-base Naval credit union and no permission from my CO was required. Even if I was ignorant of the reg, I doubt the loan officer would have been.

I have to ask for a cite on this please.

Jim
Active Duty Air Force in tech school here. I was required to attend a mandatory financial briefing a couple of weekends ago, and while they did address payday loan places and why we should avoid them in much the same manner we wish to avoid four hour long financial briefings, they did not say anything about requiring permission from our superiors to get a loan.

Incidentally, another neat perk of being in the military is being able to pull out of an apartment lease without penalty (at least in the state of Texas, I have no idea if this is a federal thing or not) as long as you present a copy of your orders to your landlord on request when you cancel the lease.
Reply With Quote
  #18  
Old 10-07-2007, 09:25 AM
ASAKMOTSD ASAKMOTSD is offline
Guest
 
Join Date: Apr 2006
Quote:
Originally Posted by Harmonious Discord
I believe Reagan removed the 18% limit that was on loans.
Yep - According to this , "In 1980, due to inflation, national banks (banks that generally include N.A. in their name), federally chartered savings banks, installment plan sellers and chartered loan companies were exempted from state usury limits by the federal government through a special law. This effectively overrode all state and local usury laws."

So apparently, the answer to the question of when loan sharking became legal in the US is "1980".
Reply With Quote
  #19  
Old 10-07-2007, 09:34 AM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
Quote:
Originally Posted by bob_co
The title shoud be
When did high interiest rate loans become leagal in the US? and what are your local laws on usury?

Loan sharking by definition has never been leagal.
I've edited the title.
Reply With Quote
  #20  
Old 10-07-2007, 09:40 AM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
Quote:
Is Payday Lending Legal?

Payday Lending Is Illegal in New York

• States traditionally regulate the small loan market and license lenders who are allowed to charge relatively high rates to make small loans available to consumers without perfect credit standing. New York's civil usury cap is 16 percent interest a year (New York General Obligations Law § 5-501 and New York Banking Law § 14-a, subd. 2). The criminal usury cap is 25 percent annual interest (New York Penal Law § 190.40). Check cashers are prohibited from cashing checks with deferred dates in New York.

• New York is one of fifteen states with a usury law or small loan rate caps that apply to loans of up to $500, the typical payday loan size. See attached chart for list of states that prohibit the high cost and short terms of payday loans.

• Two states set no usury limits for licensed lenders. Payday lenders operate in those states with no limits on their finance charges or loan terms.

• Thirty-three states and the District of Columbia have enacted safe harbor laws to exempt payday lending from small loan and/or usury laws and to authorize single payment loans based on check-holding. Restrictions on payday lending vary widely among these states. Authorized maximum loans range from $255 to $1,000. There is no minimum term for loans in 25 states, and the highest maximum term is six months in Ohio. The vast majority of payday loans are for a few days up to two-weeks in length.

Finance charges permitted for payday loans in states that cap fees range from 10% of the loan plus up to $5 administrative fee in Florida to 25% of the loan in Montana. Eight states set no limit on payday loan finance charges.
http://www.nypirg.org/Consumer/payday/

http://www.consumerlaw.org/initiativ...e/payday.shtml

This is particularly good and recent: http://papers.ssrn.com/sol3/papers.c...act_id=1000041 (click download document and then click one of the links to view the huge pdf).

A good source of resources on payday lending and military personnel: http://www.responsiblelending.org/is.../military.html

And two threads on usury or payday loans:
http://boards.straightdope.com/sdmb/...d.php?t=398523
http://boards.straightdope.com/sdmb/...d.php?t=316336

Last edited by Gfactor; 10-07-2007 at 09:45 AM..
Reply With Quote
  #21  
Old 10-07-2007, 09:58 AM
Tripler Tripler is offline
Charter Member
 
Join Date: May 2000
Location: JSOTF SDMB, OL-ABQ
Posts: 6,806
Quote:
Originally Posted by alphaboi867
Because they're expected to devote all their thoughts and efforts to the defence of the nation without having to worry about problems at home. Any civil proceedings (including foreclosures, evictions, divorce) are suspended while they're on active duty. It's called the Servicemembers' Civil Relief Act and the idea dates to the Civil War
This is true . . . to an extent. The SSCRA will protect you against default judgments while on a deployment (or on Temporary Duty, or in a school, a Reservist called to Active Duty away from home, etc.), but if you're "in garrison" at home station while on active duty, you're going to need to show up to that court date.

And like Raguleader said, a commander's permission is not required to obtain a loan of any sort. For the Air Force, it is however, required if you are trying to get a second job somewhere (i.e. moonlighting at Lowe's or a bookstore). This is to make sure your time spent elsewhere will not hinder or otherwise affect your military duties or bring discredit on the Armed Forces. They don't want Airman Joe Bag O'Donuts working as a blackjack dealer while wearing his uniform. This is also another reason a SSgt (former) Michelle Manhart was reduced in rank and then dropped from active duty this past summer: she posed in Playboy and gave the impression of Air Force condonement. A Commander would have put the nix on that pretty quick. . .

So payday loan agencies do tend to prey on poorer areas, because they know the revolving need for credit and quick cash will always be there. The military is no different--they know Airman Joe Bag O'Donuts is going to fall short on a paycheck, and will need a little boost here and there.

[My $0.02]
My personal theory on why it's a hot topic is that the media loves to focus on stories where "military members are victimized". It's hot political fodder too. . . that's why there's so much focus on the military payday loan scams, and the start of legislation against it. Never mind the fact that thousands more are being scammed by these folks. Once we remove certain social stigmas about pride and asking for money (like, from family or good friends), I would hope a lot of these places dry up quick--and title loan places too. . .
[/My $0.02]

Tripler
I had a friend once that applied for a second weekend job at a coffee kiosk. Job title: "Coffee Slinger" Job description: "sling coffee". Commander found it hilarious, and signed off on it.
Reply With Quote
  #22  
Old 10-07-2007, 11:21 AM
Anachronism Anachronism is offline
Guest
 
Join Date: May 2000
I believe the payday loan places get around limits on interest rates by charging 'fees'. If you have to pay a $10 fee every week to renew the loan it would be the same as an outrageous annual interest rate.
Reply With Quote
  #23  
Old 10-07-2007, 12:46 PM
JRDelirious JRDelirious is offline
Charter Member
 
Join Date: Aug 1999
Location: San Juan, PR
Posts: 10,487
So according to Gfactor's cites, basically the answer to the Thread Title is that they don't because where payday loan shops operate, what they do is within the legal allowances of the laws that regulate lending.

Last edited by JRDelirious; 10-07-2007 at 12:46 PM..
Reply With Quote
  #24  
Old 10-07-2007, 01:30 PM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
Here is a good article on credit cards and usury law: http://www.bankrate.com/brm/news/cc/19980202.asp

Quote:
Originally Posted by Anachronism
I believe the payday loan places get around limits on interest rates by charging 'fees'. If you have to pay a $10 fee every week to renew the loan it would be the same as an outrageous annual interest rate.
Most states define interest broadly enough to cover "fees" or just don't define usury in terms of "interest."

E.g.,
Quote:
No person or corporation shall, directly or indirectly, take or receive in money, goods, things in action, or any other valuable thing, any greater sum or value for the loan or forbearance of money or goods, things in action, or any other valuable thing, than is prescribed in § 4-57-104
http://www.arkleg.state.ar.us/NXT/ga....0#JD_4-57-105
Reply With Quote
  #25  
Old 10-07-2007, 02:14 PM
mangeorge mangeorge is offline
Charter Member
 
Join Date: Mar 1999
Location: Berkeley, CA
Posts: 14,089
I sense a conspiracy!

It seems to me that these "legal" loan sharking outfits, and unsecured/pre-approved credit card offers, flourished with the toughening of bankruptcy regulations.
Peace,
mangeorge
__________________
Stop smoking. Do it!
Neither Windshield nor Bug am I.
Give us br'er rabbits.
Reply With Quote
  #26  
Old 10-07-2007, 04:20 PM
bob_co bob_co is offline
Guest
 
Join Date: Jul 2007
Doing a little further research ...
It was a corporate policy to get permission of a CO for a payday or title loan because of Servicemembers' Civil Relief Act and the limited ability of the loan agency to enforce the terms of the loan. This was not universal across the industry.

This is a moot point now.
Reply With Quote
  #27  
Old 10-08-2007, 12:16 PM
Chronos Chronos is online now
Charter Member
 
Join Date: Jan 2000
Location: The Land of Cleves
Posts: 55,206
Quote:
I believe Reagan removed the 18% limit that was on loans.
Quote:
Yep - According to this , "In 1980, due to inflation, national banks (banks that generally include N.A. in their name), federally chartered savings banks, installment plan sellers and chartered loan companies were exempted from state usury limits by the federal government through a special law. This effectively overrode all state and local usury laws."

So apparently, the answer to the question of when loan sharking became legal in the US is "1980".
That doesn't look like a "yep" to me. Reagan wasn't in office in 1980, so he can't take any blame (or credit) for a law that was passed in that year.
Reply With Quote
  #28  
Old 10-08-2007, 12:31 PM
elbows elbows is online now
Charter Member
 
Join Date: Jan 2000
Location: London, Ontario
Posts: 8,982
Isn't the real question why doesn't anyone care that the weak and vulnerable among us are being preyed upon by the strong and the mighty?

Perhaps we're all savy enough to avoid this trap but what of the less savy? It seems like the usury laws were there to protect them from this very thing.

Is it really okay for us to just stand by and watch? We see the trap, how cold and heartless it is and do nothing to change it. How is that okay?
Reply With Quote
  #29  
Old 10-08-2007, 12:55 PM
danceswithcats danceswithcats is offline
Guest
 
Join Date: Dec 2002
Location: Voting anti-obamanation
Posts: 10,300
Anya Kamenetz wrote an interesting piece on Payday Loans and their propensity for targeting military families, but I can't find a linkable source.
__________________
Crows. Keeping our highways clear of roadkill for over 80 years
Reply With Quote
  #30  
Old 10-08-2007, 02:47 PM
LVBoPeep LVBoPeep is online now
Guest
 
Join Date: Jul 2003
Hi all,


Embarassingly, I got involved with more than one pdl and I found this website debtconsolidationcare.com, which really helped give me the information regarding getting PDLs to work with me. I went from thinking I would have to close my account in order to get control over my paycheck again all the way to figuring out that I had 2 loans that were not legal in my state. I sent !ONE! email to both companies questioning their legality and they had broken a state law regarding extensions as well, and I got notification almost right away that they would mark them paid in full (not that happy of a story, as I ended up paying ALOT more than the original principal.). So I got my big mess reduced by 50% with a little information.

There are alot of states where the internet and storefront loans are not legal or have strict regulations regarding fees, interest, amount of time a loan can be extended, etc. The site I noted above was really informative and had alot of people who had been through the same thing.
Reply With Quote
  #31  
Old 10-08-2007, 04:09 PM
Lemur866 Lemur866 is offline
Charter Member
 
Join Date: Jul 2000
Location: The Middle of Puget Sound
Posts: 16,986
Quote:
Originally Posted by elbows
Isn't the real question why doesn't anyone care that the weak and vulnerable among us are being preyed upon by the strong and the mighty?

Perhaps we're all savy enough to avoid this trap but what of the less savy? It seems like the usury laws were there to protect them from this very thing.

Is it really okay for us to just stand by and watch? We see the trap, how cold and heartless it is and do nothing to change it. How is that okay?
Well, it's true that these heartless corporations have put mom and pop loan sharks out of business.

And that's the trouble. You can make extending ridiculously high interest loans to poor people illegal, and all that does is push loan sharking underground. At least nowadays the loan sharks are above ground, and don't break people's kneecaps if they're late on a payment.
Reply With Quote
  #32  
Old 10-08-2007, 05:17 PM
mangeorge mangeorge is offline
Charter Member
 
Join Date: Mar 1999
Location: Berkeley, CA
Posts: 14,089
Quote:
Originally Posted by Lemur866
Well, it's true that these heartless corporations have put mom and pop loan sharks out of business.

And that's the trouble. You can make extending ridiculously high interest loans to poor people illegal, and all that does is push loan sharking underground. At least nowadays the loan sharks are above ground, and don't break people's kneecaps if they're late on a payment.
Having been there (poor), I can tell you that there are far more paycheck loan places than there ever were underground loan sharks. And most people would pay up as scheduled. The threat of harm was quite convincing. Actually, the shark was more likely to take property than break one's leg. For small loans, anyway.
Reply With Quote
  #33  
Old 10-08-2007, 09:47 PM
ASAKMOTSD ASAKMOTSD is offline
Guest
 
Join Date: Apr 2006
Quote:
Originally Posted by Chronos
That doesn't look like a "yep" to me. Reagan wasn't in office in 1980, so he can't take any blame (or credit) for a law that was passed in that year.
Good point. I stand corrected.
Reply With Quote
  #34  
Old 10-09-2007, 12:30 PM
glilly glilly is offline
Charter Member
 
Join Date: Mar 2002
Location: 9th circle of hell
Posts: 576
In defense of payday loans

I believe that to calculate the high APRs for payday loans, the fees are added into the interest. The short duration of these loans makes this APR seem quite high. Mortgages aren't required to put closing costs into APR calculations because closing costs are not part of the periodic payment. But because payday loans typically only have one payment, it is easier to mix fees and interest to calculate an APR with the two.

For example, if I took out a mortgage for $150,000 at 7% with $2000 closing costs, then the next week paid this loan off (say, after winning money), the interest charge would be about $200. However, I could complain that the mortgage company charged me $2200 for a one-week loan, and that amounted to an APR of 76%.

If payday loan places were only allowed to charge fees and interest that equaled prevailing rates for unsecured loans (say 22%), a one week loan for $500 would gain the loan company only $2.11.

I doubt that $2.11 would pay for processing, let alone the risk of unpaid loans. (This IS profitable for credit card companies because the fees that credit cards charge for transactions are charged to the VENDOR so they get more than just the 22% interest and because the system has lower transaction costs [Visa doesn't have to rent a storefront, pay for armored cars to go to that location, and man it with someone to handle each transaction].)

I don't know prevailing charges, but for a high-transaction cost short-term loan, I think the fees I've seen in the past were reasonable for an unsecured loan. If YOU were going to lend money to some random person who was promising to pay you back on payday (or even promising to give you his paycheck), and the money you were loaning and the interest earned would come from/go to your kid's college fund, you'd probably want more than $2.11 to make it worth the risk and the time.

The problem really comes when people are buying multiple short-term loans, using them inappropriately as long-term loans. They should be using a different instrument (or, better yet, getting their financial house in order). But if these places aren't allowed to charge fees without running afoul of usury laws, they won't be able to afford to lend money on a short-term basis.

Would "society" be better off if people couldn't get trapped by these? Probably (only probably because some people will screw themselves by whatever means possible, and I don't know if the alternative to payday loan screwing (bounced checks, perhaps?) is better or worse). Is it worth depriving reasonable people of easy short-term loans in order to protect some people from themselves? Maybe not.

But to confuse fees with interest (especially in short-term, high-transaction cost loans where the interest will be trivial) and to confuse misuse of loans with reasonable use of loans isn't helpful in understanding why people use these loans, why places are willing to lend, or how to keep people out of a trap.
Reply With Quote
  #35  
Old 10-09-2007, 01:06 PM
Lemur866 Lemur866 is offline
Charter Member
 
Join Date: Jul 2000
Location: The Middle of Puget Sound
Posts: 16,986
As I said above, clearly the alternative to payday loans is illegal loan sharking. If you shut down the legal payday loans, people who have money troubles are going to see Guido down the street, and Guido doesn't have to worry about violating usury laws, and none of his customers are going to complain because they don't want to end up short a kneecap. Of course, usually it doesn't come down to kneecaps, the mere knowledge that it COULD come down to kneecaps is enough to keep it out of the kneecap realm for all but the dumbest borrowers.
Reply With Quote
  #36  
Old 10-09-2007, 01:29 PM
mangeorge mangeorge is offline
Charter Member
 
Join Date: Mar 1999
Location: Berkeley, CA
Posts: 14,089
When I was in the Navy a couple friends and I ran what's called a "slush fund", which is strictly against the rules. Anyway, we loaned "five for seven" which we would give them five dollars (or multiples therof) and they would pay us back seven dollars on payday. How many days that was wasn't an issue. We had an enforcer who would collect at the end of the pay line on payday. Nobody ever defaulted. No reason to, room and board were guaranteed.
We made a ton of money, hundreds of bucks each month apiece. And this was in the mid-sixties, when that was a lot of cash. So much so that we got nervous and disbanded. Two of the guys went independent, but on a very limited scale.
Reply With Quote
  #37  
Old 10-09-2007, 01:47 PM
Throatwarbler Mangrove Throatwarbler Mangrove is offline
Guest
 
Join Date: Apr 2002
Quote:
Would "society" be better off if people couldn't get trapped by these? Probably (only probably because some people will screw themselves by whatever means possible, and I don't know if the alternative to payday loan screwing (bounced checks, perhaps?) is better or worse). Is it worth depriving reasonable people of easy short-term loans in order to protect some people from themselves? Maybe not.
Micro-lenders in poor countries generally charge real rates of interest similar to what payday loans charge, and yet it is generally accepted than micro-lending has been a net positive for very poor communities, albeit they also face some of the same criticism.
Reply With Quote
  #38  
Old 10-09-2007, 02:21 PM
Lemur866 Lemur866 is offline
Charter Member
 
Join Date: Jul 2000
Location: The Middle of Puget Sound
Posts: 16,986
Except micro-lenders are heavily subsidized non-profit organizations. Micro-lending is another form of direct aid, but without some of the negative externalities of simply handing over cash to people.
Reply With Quote
  #39  
Old 10-09-2007, 02:26 PM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
This discussion has drifted into GD territory. I'm going to move it from General Questions to Great Debates.

Gfactor
General Questions Moderator

Last edited by Gfactor; 10-09-2007 at 02:26 PM..
Reply With Quote
  #40  
Old 10-10-2007, 07:01 PM
KidScruffy KidScruffy is offline
Guest
 
Join Date: Sep 2005
Quote:
Originally Posted by glilly
I believe that to calculate the high APRs for payday loans, the fees are added into the interest.
I hope I'm not bringing back a thread that pretty much ran its course, but I used to work as an office manager of a payday lending store here in California. Our max loan was $255, and $300 was paid back (next payday, but no more than 15 days), and we would refer to the $45 as a "fee" rather than interest. We would also allow people to pay $45 on the loan due date to extend the loan another 15 days. We had one person who borrowed $255 and paid the $45 "fee" religiously every two weeks for over two years.

The legislators didn't like how similar this was to a ridiculously high interest loan, and they changed the law (probably changed again since then, I don't know) -- people were no longer allowed to "refinance" their loan by paying the interest. So what did this mean to us? It meant that instead of customers refinancing, they would bring in the full $300 payment...and then they could borrow $255 again (most of them did). Believe it or not this did have an impact on business -- some people just couldn't come up with the $300 on their due date. In order to come with the difference, some of them went out and got another payday loan at another store.

More relevant to the original OP, I also had many people ask me how we got away with usury. I kind of wondered if they thought we were an illegal business, or if they were using some biblical definition of usury. Of course, I didn't really have a good answer for them ("Well, it is legal, so I don't think it's usury...").
Reply With Quote
  #41  
Old 10-11-2007, 08:13 AM
Renob Renob is offline
Guest
 
Join Date: May 2003
Quote:
Originally Posted by elbows
Isn't the real question why doesn't anyone care that the weak and vulnerable among us are being preyed upon by the strong and the mighty?

Perhaps we're all savy enough to avoid this trap but what of the less savy? It seems like the usury laws were there to protect them from this very thing.

Is it really okay for us to just stand by and watch? We see the trap, how cold and heartless it is and do nothing to change it. How is that okay?
Ah, modern liberalism at its core. "We, the smart and moral, need to make laws because other people are too stupid or immoral to run their own lives." How paternalistic.

You may think you are smarter than the people who use payday loan places, but I guarantee you that at the very least, those folks know more about their own financial situation than you do. They are also adults, who are capable of making a decision on their own. They go into these places and are fully aware of what they are getting into. They know the fees, they know the payback period. They willingly make a decision to enter into this arrangement. But you think that you are so much smarter than they are that they should be prevented from doing so. Well, since you are sitting there with your high IQ, what's the alternative? These people go to these places for a reason. If payday loan places aren't allowed to exist, what do you propose to replace them with?
Reply With Quote
  #42  
Old 10-11-2007, 08:35 AM
Ludovic Ludovic is offline
Charter Member
 
Join Date: Jul 2000
Location: America's Wing
Posts: 23,275
And it's my understanding that microloans are expensive but not as expensive as payday loans. At the most microloans are %100 (although I've never heard of one that was, and some can be in the 30's) whereas payday loans can exceed %300 and are typically never below %100. So microloans are in the same league as payday loans in the same way that credit card interest is in the same league as microloans, i.e. not very much.
Reply With Quote
  #43  
Old 10-11-2007, 08:48 AM
Anachronism Anachronism is offline
Guest
 
Join Date: May 2000
Quote:
Originally Posted by Renob
Ah, modern liberalism at its core. "We, the smart and moral, need to make laws because other people are too stupid or immoral to run their own lives." How paternalistic.

You may think you are smarter than the people who use payday loan places, but I guarantee you that at the very least, those folks know more about their own financial situation than you do. They are also adults, who are capable of making a decision on their own. They go into these places and are fully aware of what they are getting into. They know the fees, they know the payback period. They willingly make a decision to enter into this arrangement. But you think that you are so much smarter than they are that they should be prevented from doing so. Well, since you are sitting there with your high IQ, what's the alternative? These people go to these places for a reason. If payday loan places aren't allowed to exist, what do you propose to replace them with?
Quote:
Originally Posted by KidScruffy
I hope I'm not bringing back a thread that pretty much ran its course, but I used to work as an office manager of a payday lending store here in California. Our max loan was $255, and $300 was paid back (next payday, but no more than 15 days), and we would refer to the $45 as a "fee" rather than interest. We would also allow people to pay $45 on the loan due date to extend the loan another 15 days. We had one person who borrowed $255 and paid the $45 "fee" religiously every two weeks for over two years.
Anyone who pays the equivalent of 400% annual interest is either in a horrible situation or has very poor financial management skills (or if you prefer 'Stupid'). Anyone who does this for a long period of time is defiantly in the second category like example given by KidSkruffy. Do you think someone who pays $2340 over two years on a $255 loan is intelligent and knows what he's getting in to? (And he still owes the original $255)

I don't claim to have the answer but if these kind of rates where illegal either they would charge more reasonable rates or not exist. If they didn't exist perhaps it would force people to be more responsible with their money since they didn't have the option of a loan on very poor terms.

Personally I consider myself a libertarian but I am torn with the feeling that some people need to be protected from themselves.
Reply With Quote
  #44  
Old 10-11-2007, 09:03 AM
mangeorge mangeorge is offline
Charter Member
 
Join Date: Mar 1999
Location: Berkeley, CA
Posts: 14,089
KidScruffy;

I understand that the real default rate, where the loan company never recovers it's money, is very low. Due to new bankruptcy laws, it's almost impossible for someone to get out of repaying the loan. The loaner simply goes after any source of income the borrower might have, and collects the loan amount plus more fees. In the end they almost always get the money.
True?
Reply With Quote
  #45  
Old 10-11-2007, 09:07 AM
Renob Renob is offline
Guest
 
Join Date: May 2003
Quote:
Originally Posted by mangeorge
I understand that the real default rate, where the loan company never recovers it's money, is very low. Due to new bankruptcy laws, it's almost impossible for someone to get out of repaying the loan. The loaner simply goes after any source of income the borrower might have, and collects the loan amount plus more fees. In the end they almost always get the money.
True?
I'm doing some research on the payday lending industry now, so perhaps I can answer this. For one, payday loans are unsecured loans. If they can't cash the check, the payday lenders (from what I understand) write off the loan. According to one analysis, the default rate for these loans is around 15.1%. For newer stores, it was 24.8%. That seems to be much higher than the loan default rate of other lending institutions.

Last edited by Renob; 10-11-2007 at 09:08 AM..
Reply With Quote
  #46  
Old 10-11-2007, 09:21 AM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
Quote:
Originally Posted by Renob
If they can't cash the check, the payday lenders (from what I understand) write off the loan.
Obviously not right away (I'm sure you didn't mean it like that). Most of them have in-house collection people who will start calling references listed on the loan application; some will threaten borrowers with criminal prosecution ("you bounced a check--that's a crime!"); some report the bad debt to credit reporting agencies; some will sue the borrower and take a judgment.

Regarding the default rates, some claim they are overstated, but even if they are, they're probably still higher than many other kinds of loan:

Quote:
Credit quality data for specialty payday lending entities is lacking since most payday lenders are small, non-publicly traded firms. Review of publicly traded company reports indicates that some specialty payday lenders have recently recorded quarterly annualized net charge-off ratios as high as 83 percent,3 far higher than the typical annualized net charge-off ratio for subprime credit card lenders. Recent charge-off ratios for subprime lending institutions' credit card portfolios, while still high, typically do not exceed 20 percent. Higher default rates for payday loan portfolios indicate that loan loss reserves and capital levels that may be adequate for some other forms of subprime lending may not properly cover the greater risks associated with payday loans.
http://www.fdic.gov/bank/analytical/...012903fyi.html

But see, http://www.responsiblelending.org/is...temID=29557872
Reply With Quote
  #47  
Old 10-11-2007, 11:15 AM
KidScruffy KidScruffy is offline
Guest
 
Join Date: Sep 2005
Quote:
Originally Posted by mangeorge
I understand that the real default rate, where the loan company never recovers it's money, is very low. Due to new bankruptcy laws, it's almost impossible for someone to get out of repaying the loan. The loaner simply goes after any source of income the borrower might have, and collects the loan amount plus more fees. In the end they almost always get the money.
True?
I wish I could remember off-hand, but my recollection is similar to what Renob said - a pretty high default rate, around 25-30% sounds right for my store.

I did collection calls as well. If a customer failed to come in on their due date, we would deposit the post-dated check they had given us, and many would bounce. Then I was to call the person and every reference he had given us, everyday, until he agreed to come in and pay. This was to continue until either a) we no longer had any useful contact information, b) they paid, c) we would sell their loan to a collection agency, or d) they would get written off (c or d usually only after 6-9 months of collection attempts).

I only remember ever receiving a couple of bankruptcy letters, they were pretty rare. More often, I would get a few "Oh, I'll be in next week"s, and then a disconnected number, then a "he no longer works here" from his employer, and increasingly tight-lipped friends (they were probably as annoyed with the defaulter as they were with me calling them).

I'm pretty sure I was told never to threaten criminal prosecution, but I'm not sure why. We also never did any credit reporting, or lawsuits, although we probably did use those as threats.

I'm starting to feel like the bad guy now, I hope I don't get run out of this thread on a rail. But I did quit the job mainly because I was sick of seeing people trying their hardest to ruin their lives.

On an amusing note, there were a large number of customers who would drive up in their current year BMW or Mercedes to take out a loan, because after making their car payment they didn't have enough cash to put gas in the tank (brings to mind some scenes in "Boiler Room").
Reply With Quote
  #48  
Old 10-11-2007, 12:02 PM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
Quote:
Originally Posted by KidScruffy
I'm pretty sure I was told never to threaten criminal prosecution, but I'm not sure why.
In most (I say most because I haven't looked it up, but it's probably all) states, bouncing this type of check isn't a crime. Threatening criminal prosecutioncan is sometimes barred by the rules that govern payday lenders, state collection laws (the Fair Debt Collection Practices Act doesn't apply when the creditor collects it's own debts). In some cases threatening criminal prosecution can violate criminal laws, too. It's not a smart thing to do, but I've seen cases where it has happened.

Quote:
For example, they will be threatened with jail for passing a bad check, even though the law specifically says they cannot be prosecuted if the check bounces.
http://www.consumersunion.org/finance/paydayfact.htm

Quote:
Attorney General Darrell McGraw recently secured a "payback" from an Ohio payday lender that threatened criminal prosecution and committed other debt collection violations when pursuing West Virginia consumers who defaulted on loans. As a result of a recent settlement agreement secured by McGraw’s office, Ohio Valley Check Cashing and Loan of Gallipolis, Ohio, issued more than $42,000 in cash refunds and debt cancellation to 81 West Virginia consumers harmed by the company’s practices.
http://www.wvago.gov/press.cfm?ID=219&fx=more

Quote:
You can be threatened with prosecution for "hot" or "bounced" checks, even though the lender knew at the time you wrote the check that you had insufficient funds in your account—that was the reason for the loan. This is not allowed in Indiana.
http://www.in.gov/dfi/education/payday_loans.htm
Reply With Quote
  #49  
Old 10-11-2007, 12:30 PM
Gfactor Gfactor is offline
of the Gladiators
Moderator
 
Join Date: Dec 2003
Location: Detroit
Posts: 9,491
Here, by the way, are a couple of state-by-state summaries of payday lending laws:

http://www.ncsl.org/programs/banking...lend-intro.htm
http://www.credit.com/credit_informa...ayLoanLaws.jsp
http://www.paydayloaninfo.org/states.cfm
Reply With Quote
Reply



Bookmarks

Thread Tools
Display Modes

Posting Rules
You may not post new threads
You may not post replies
You may not post attachments
You may not edit your posts

BB code is On
Smilies are On
[IMG] code is Off
HTML code is Off

Forum Jump


All times are GMT -5. The time now is 04:10 PM.


Powered by vBulletin® Version 3.8.7
Copyright ©2000 - 2014, vBulletin Solutions, Inc.

Send questions for Cecil Adams to: cecil@chicagoreader.com

Send comments about this website to: webmaster@straightdope.com

Terms of Use / Privacy Policy

Advertise on the Straight Dope!
(Your direct line to thousands of the smartest, hippest people on the planet, plus a few total dipsticks.)

Publishers - interested in subscribing to the Straight Dope?
Write to: sdsubscriptions@chicagoreader.com.

Copyright © 2013 Sun-Times Media, LLC.