Still, the reason I’m voting NO has nothing to do with me making an informed decision. I’m voting NO because I’m sick of seeing payday loan stores on every single street corner with their ugly signs “CASH NOW!!!”
Is this really a good way for me to decide how to vote on a ballot proposition? I think it is similar to how I vote to support smoking bans: I hate smoking and I want it banned.
Of couse, now I wonder what will happen to all the payday loan places if the proposition is defeated? Something worse and uglier?
I don’t know much about it, but what I’ve read right here on these boards is those payday loan places are basically legalized loan sharking, and as far as I’m concerned, loan sharking is supposed to be illegal, whether it’s “we breaka you legs,” or it’s “sure, just pay us reprehensible interest rates!”
The ballot measure was written by the payday loan industry. I don’t believe they have any intention of reducing the number of storefronts. They just want the exception from Arizona’s usury laws put in the constitution.
The reason they have to charge high interest rates (500+% APRs, similar to Pawn shop rates) is precisely because they cannot ‘breaka you legs’. And they are dealing with extremely high-risk populations. So they have to be compensated for it in a different way.
If you can’t charge high fees (which effectively translate into high interest rates) or high interest rates for such populations, the proposition makes no economic sense for the lender without high APRs. And if they go out of business, the would-be borrowers may indeed go to the next-best alternative, which is somebody who threatens to ‘breaka you legs’.
There is a whole sector of the lending economy known as ‘hard-money lenders’ who also charge extremely high interest rates for what (seems like) legitimate business purposes. I know a few individuals who are in the business. Their typical client is someone who needs the money for a short period of time - usually a month or so - to close a real-estate deal, or an equity investment in a small company, or some other transaction that is complicated, time-consuming to underwrite and/or unpalatable to banks for some other reason. The lender will usually charge anywhere from 5-15% plus fees for a month. You can multiply that by 12 and get a feel for the APR.
The loans are usually heavily collateralized with low LTVs in the 50% range. This is so the lender has high confidence they can recover if the borrower defaults. Sound familiar? It’s basically pawn-broking, but at a much larger scale and more ‘legitimate sounding’.
Payday loans are often unsecured and therefore have little recourse to the lender in the way of asset reclamation if the borrower defaults. Therefore, the interest rates need to be sky-high to accomodate for that lack of recovery potential.
A lot of people have a lot of energy aligned against outlawing these joints. I’m somewhat indifferent, other than to notice that if they are growing and successful it’s probably for a reason. Meaning, there is demand for their services. The demand will likely go elsewhere if the payday loan shops go away. I know people would love to believe otherwise, but human history has shown that not to be the case.
I firmly believe in letting people make their own bad decisions, and then taking the consequences.
Many people use payday loans to get them out of a short term bad financial spot, then pay them back as they agreed. Some can’t or don’t pay them back as agreed, and they have to pay a high interest rate that they agreed to ahead of time.
If this weren’t legal, they would be stuck. Banks don’t loan $150 for a week. They would have no place to get such a loan. And with the credit crunch, they’ll have even fewer choices.
The Grameen Bank, which is essentially a somewhat more benign payday loan scheme (i.e. 20% interest and non-profit instead of 100% or whatnot) has received a Nobel Prize for their poverty -reduction efforts. Why are you opposed to having the same kind of service in your neighborhood?
Interesting so you are voting that a service that many people find necessary should not be available, thus removing the ability for people to acquire cash if they are in dire straits and ending the livelihood of many people. How magnanimous of you.
Is it really better for people to just not pay their bills, or even commit crimes to get a little money, than to do the right thing, suck it up and pay a little bit of interest if that’s what it takes to manage their financial affairs legally and responsibly?
I’ve done a number of research studies for consumers of payday lending shops. I used to work in the financial services industry and I had an interest in understanding the value proposition to, and satisfaction of, consumers who used payday lenders relative to the products my businesses were offering.
I’m not going to be able to offer any cites or any supporting evidence for these studies. They were proprietary, of course, and I choose to remain anonymous on this board. So you are just going to have to believe me. If you don’t want to you are free to move on to the next thread.
The satisfaction with payday lenders was surprisingly high. Much higher than credit cards, for example, where the effective price of the credit card product (the APR) is much lower than payday loans. Credit cards are usually in the 30-50% range for subprime credit risks, with payday loan shops in the 500+% range.
But consumers don’t like credit cards because they often feel confused, surprised and/or trapped by fine print, or out-of-the-blue repricing, fee increases or billing cycle changes. That pisses them off more than anything else.
Most payday loan offers, however, are extremely clear and simple to understand. Borrow $100. Pay back $115 in two weeks. That’s it. That’s all there is to it.
Our research found that consumers appreciated that clarity. Plus, they like the storefronts in convenient locations. They like having control over walking into a storefront more than having junk mail clog up their mailbox.
And a lot of people do pay back the loans the first time. Some don’t, of course, and a fee spiral can quickly ensue whereby a borrower needs to come up with $200, or $300 or even more to pay back the original $100. Those situations are terrible and are usually the anecdotal evidence cited for shutting the joints down. But as we’ve discussed above, a high-cost unsecured lender dealing with an extremely high-risk population doesn’t have much of a choice if he wants to get some fraction of his original $100 back.
I would agree we are capable of deciding for people sometimes, yes. Wear your seat belt. You’re not supposed to buy crack. Don’t borrow money at exorbitant interest rates and fees.
I don’t see the problem with that.
When I was in the military, base commanders would sometimes declare certain local businesses “off limits” to military members because while their business was legal, it was ripping people off. Those “rent-to-own” furniture places come to mind.
Sure, we can decide a certain type of business, however legal, is bullshit.
I have firsthand experience with this. Micro-finance loans are given to fund income-generating activities. Usually borrowers are expected to explain in great detail what business project they are funding with the money and how they expect to earn it back. Often the recipients are given guidance on how to manage their money and run their business. Finally, not too much happens if they can’t pay it back- they aren’t going to lose their homes or anything like that.
I don’t have a problem with them. I see them as a useful service for those who are financially challenged, and if you meet the terms of their loans, it certainly beats missing a payment to someone else or getting charged for overdrafts or bounced checks. At least these companies are up front about the cost of their service.
It’s the credit card companies that really seem to be out to trap the unwary and unwise with fees ridiculously out of proportion to the delinquent or late amount, and it’s just those people who are the biggest cash cows for these companies. While it’s true they have to disclose their rates and charges up front as well, they don’t have to do it nearly as openly.
I used to work as an office manager of a payday lending store here in California, and I would say a majority of our customers were repeat customers – whether that meant coming in every two weeks to pay interest, or coming in 4 or 5 times a year. Very few people came in just once, and an unfortunately high percentage never paid back the loan.
Actually, regarding the “paying interest every two weeks”, that was eventually outlawed in California. A person who couldn’t afford to pay the whole amount would often struggle to come up with the money (often borrowing from another payday lender), pay it off, and then turn right around and borrow it again.
But here’s something to consider. Many banks that offer direct deposit will also offer to advance you money on your upcoming direct deposit. The loan plus a fee is then taken out automatically from your next direct deposit. Is this type of transaction also affected by the legislation? Here’s an example of Wells Fargo’s Direct Deposit Advance service:
It sounds an awful lot like our business, actually, except they have a much easier time getting paid back…