There’s a commercial for WESTERNSKY running here now. It’s a Native American-owned business which operates within the boundaries of the Cheyenne River Sioux Reservation. They lend money. “It’s not cheap”, they explain. In fact from their website:
They claim they can/will lend you up to $10,000 a day.
I understand the basic concept - lend money, get more back - but my question is who are these people that need $10,000 now (because presumably they are broke) but will have it to pay back? If you are not a good enough risk for a regular bank loan, surely you are going to have trouble paying back what appears to be a street loan. And what will they do if you don’t pay… other than having it “adversely affect borrower’s creditworthiness” which I’m assuming is already in jeopardy.
There’s plenty of people out there who make decent incomes but simply lack financial discipline. These sorts of people often run out of money between paychecks or have unforeseen expenses and don’t qualify for traditional credit instruments because of their credit history, but nevertheless have the income to easily pay off a short-term loan. I don’t know about Western Sky, but the the payday loan places usually ask for at least some proof of income.
The risk is pretty well mitigated by how high those interest rates are. In the example in the quote box, the principle is paid back after 10 months and if the person actually does carry the loan to term, that’s about 74 months (and $34k!) worth of gravy. They can get judgements to garnish wages and seize assets, but for the most part the business model is simply to charge enough interest that you can still make money even if some relatively large proportion of your customers are going to end up defaulting on some portion of the loan.
They’re right when they say it’s not cheap. That $5,000 loan will cost $40,947.72 if you pay it off in seven years.
If you don’t pay it off, it rolls into another loan. The “no obligation” on their website is odd - perhaps they know that most people will pay off their loans, so they can afford a few defaults.
No, they know a lot of people in their target market will be unable to pay off their loans, which is why they charge a while lot more than an institution which lends money to people with, shall we say, more conventional financial habits.
Drug addicts for one, they might have a good job but be out of money until the next payday and they’d rather not go through WD than pay off an onerous loan.
Other desperate people who for one reason or another need money for an emergency this instant of everything will crash, but they have steady cash flow or good prospects for cash flow.
Depends on what state you’re in, but most of them have some sort of restrictions on pay day lenders and a handful outright ban them. In my state, a couple of years ago we passed an initiative that capped annual interest at 36%, which put most of the pay day loan places out of business overnight (in my town many of them were replaced with much more upstanding marijuana dispensaries).
Loansharking is very profitable. THe people who go to a loanshark are either:
-desperate (cannot qualify for a bank loan)
-stupid
-unable to tap another source of credit (degenerate gambler, crooked businessman, drug dealer,etc.)
The high interest rates are wonderful for the shark-and if you don’t pay, you might have something bad happen to you.
Kevin Weeks (Boston loanshark and Whitey Bulger gang member) claimed to have $250,000 “on the street” (let out fpor loan). If he netted $50,000/week, he was making serious money (and tax free).
For the payday loans, there’s a psychological factor to consider. At one time, illegal loansharks who operated in a similar way were called “six for fivers” - “I’ll give you five bucks today for six on payday”. For the low paid worker who simply doesn’t have enough cash to stretch to next payday it doesn’t sound that bad, even though 20% a week is crazy, and when the guy forks over the six bucks to the shark as soon as he gets paid, he’s just setting himself up to not make it to payday again. Of course, in modern day terms, larger amounts than 5 bucks will apply, but the idea will still be that a usurious interest rate on a moderate sum over a short time period doesn’t sound horrible to the guy who really needs the money NOW, and knows he’ll get paid next week.
I once found myself in a pinch (entirely my own doing) where I needed cash when I had an expired ATM card and no bank nearby. Ended up taking a very expensive cash advance from my CC via an ATM. I don’t recall what the overall rate was (there were “fees” that one might count), but I was glad to have the option. I imagine these loan companies serve those who don’t have the same access to a credit card.
I found myself in a similar situation my third year in law school when I had originally bailed out on a spring break trip to Cancun w/ some friends because I had other plans, which were canceled at the last minute (the Wednesday before break). I ended up getting a Tax Refund Anticipation Loan (RAL) online and had ~$3,500 direct deposited in my checking account the next morning, minus a fee to the tune of about $200, which more than covered the trip. I know that advocates for the less fortunate consider these to be predatory loans (b/c the loan is only till the IRS pays you your refund, which, if you file online, which will be within 2 weeks I believe, and $200 to borrow $3500 for less than 2 weeks, compounded annually, is about as bad as it gets when it comes to borrowing from a “legitimate” source) and while I understand the logic behind that, I personally didn’t feel cheated at all, in fact I have this service to thank for some great memories. Of course, if you find yourself in this situation every tax season, then you should probably take a long hard look at how you manage your finances.
It’s a payday loan (even though some of these companies claim that they’re not “payday loans”). The lender isn’t really at risk. They lend to people with jobs, and with direct deposit, and they require that the borrower given them access to the bank account in which his or her paycheck is deposited. They withdraw their payment about ten seconds after the paycheck is deposited.
I suppose there’s some risk of the borrower losing his or her job before the paycheck is deposited, but as long as the borrower is working, the lender is getting his money.
It’s legal loansharking, that’s all. Maybe this lender is exempt from some of the laws regulating payday loans because they’re on an Indian reservation, but I really don’t know anything about that.
It’s actually even better for the lender than that – he may get his money even if the borrower loses his job.
The repayment is not processed as a check, but as an “Electronic Finds Transfer”, and my experience is that an EFT has certain privileges not given to other withdrawals. For example, the transfer will be processed even if there are insufficient funds to cover it. The bank will go after the borrower for the difference, but the lender has his money back. (for the time being at least - I don’t know whether the bank can reverse it when they give up on the borrower)
