The Commonwealth of Virginia has adopted strict limits on “payday loans.” These are, for the uninitiated, very short term, high-interest/fee loans intended to be repaid by the loan recipient’s next payday. As a result of these new restrictions, five payday lenders are closing their Virginia operations.
I think the payday loan is a terrible financial product, and you’d have to have holes in your head to use one.
But I wonder if the clients of those organizations think that Virginia lawmakers did them a favor, now that they can’t get those loans anymore.
Well, it probably will impact some people who had fallen into the habit of relying upon those loans. However, in the long run, it will do them good to stop relying upon them, since they will free up for use the ridiculous interest/fees they had to pay on the loans. So I am thinking in the long run, they will be perfectly happy.
Here’s my cynical answer: the clients won’t, because they are stupid.
I know a guy who lost his (admittedly cheap) house because of payday loans. He got behind on his house note one month and so took out a loan to compensate, then kept rolling it over because he enjoyed the little "extra’ bit of money he perceived himself as having, until he got to the point where he could no longer service his debt. And this was in '02–long ere the current crisis. He did it to himself, and though I felt pity for his wife and kids, I had little for him.
Good for Virginia. I see this as similar to the banning of indoor smoking across the country - Yes, it is a huge inconvenience to a lot of people, and it certainly pissed a lot of people off, but it was done for the right reasons, and in the long run it makes things better for the vast majority of us.
Good governing isn’t just giving the people what they want.
Nothing you’ve posted necessarily means people can’t get these loans any more. 5 lenders have quit – out of how many? How many still in the business will expand into areas no longer served by the 5?
There may be some other laws to prevent this, but it may be that some “legitimate” banks might offer some new services to fill that need.
The timing is probably pretty poor for that because “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/fyi/2003/012903fyi.html
I wonder how much this has to do with the number of military families stationed in Virginia and the growing use of payday lenders by military families that cannot make ends meet otherwise. This could either be brilliant political maneuvering, or disastrous for a lot of folks.
It might also be that lowering APR from – what I’ve heard is something like 400 or 500 percent in some cases – insane to merely predatory might improve the default rate. But I have no expertise in banking to back up such an idea.
We passed a law regulating these guys in Ohio. I heard an (NPR?) story recently that explained that they’d just restructured their interest charges into “fees” and were taking something like the same interest rate. Anecdotally, I noticed exactly zero payday lenders going out of business after November. I’m curious if the Virginia law is more tightly drafted…
Oddly enough, the businesses that are staying are taking advantage of what is either an inadvertant loophole left by the new law, or a devilishly clever way to still screw consumers. They are doing “car title loans,” where the loan is secured by a car title.
So to answer Boyo Jim’s question, the majority of these lenders are shutting their doors, but some will remain. And to answer MODALIZE’s speculation: actually, yes: they DO take your car.
If you agree to put your car up as collateral for a loan, then you really can’t be surprised when it gets repo’d. I was talking about the neighborhood goon deciding on his own that you’re going to lose your car (or jewelry, or whatever) until you pay him back.
