In this thread one of the businesses discussed was check-cashing stores.
There seems to be a whole industry catering to those who can’t (or won’t) use traditional services like banks, credit cards, department stores etc. Has anybody had any experience with the “poverty industry”. Why do they do it? How can they justify very large service charges (5% to cash a check, 20% per month interest by pawnbrokers etc.)?
That’ll get you started on pawnshops. The rest? I’ll let someone else cover those.
I spent four years working in the payday loan industry, at various levels. My experience is with one specific company.
The premise of “payday loans” is that you have an expense - say new tires - and because you live paycheck to paycheck, you don’t have the extra funds to pay for them right then. You also don’t have a credit card OR the credit rating that would let you get one (this could be no credit history at all, or a very poor credit history).
There’s this place that lets you get a certain amount of money (this varies from state to state and from company to company. For example, the one I worked for maxed out at $200 in Tennessee and $300 in Louisiana). You have to have those tires to get to work, so you head in there to cash a check, and then that check won’t be deposited until you actually get paid (generally maxed at 2 weeks - and if you get paid weekly, it can often be held 2 paydays). Better yet, they don’t check your credit, so you’re almost certain to be approved.
So you get the money and your tires. Then your payday rolls around and it’s supposed to be paid off. Only, you live from check to check, and the money’s not there to pay it off. So, maybe you can just pay the fee/interest and “roll it over” until your next payday. Or maybe you pay it off and get another one right away. Or you might pay it off in full, but end up back there before you get paid again because paying it off put you behind again.
I see two sides to this issue: some people use it in a somewhat intelligent manner - they get a single short term loan, pay it off and never step foot back in the place again. Others get taken advantage of, because they are chronically short of funds, they keep rolling it over and over, paying the fee until that $300 is just another debt. Eventually they can’t pay it, the check is sent to the bank and bounces, and they either find some way to pay it or they don’t.
Justifying the fees:
Well, this company isn’t doing it out of the kindness of their heart - they do want to make something from it. So they charge what’s called a “fee” in some states, “interest” in others - this depends on what state requirements are. The amount varies, but for a two week loan, the APR generally works out to about 365%, depending on how much the fee is. Why so much? Well, partly it’s about how you advertise: Payday Loans! $300 to get you to your next payday, only $45. Or: Avoid overdraft fees! Cash a check today, we’ll hold it until your next payday and you won’t get charged $28/check by the bank - and that $45 is a bargain if you’ve got 4 checks about to bounce at OD fees of almost $30 each.
Also, this is a high risk industry. You can assume X percentage will file bankruptcy, Y will ‘go bad’ and be charged off, Z might pay but slowly…and so on. Branch staff does collections (phone and knocking on people’s doors) on a daily basis just to try to keep the delinquent numbers to an acceptable amount: IIRC, when I was in a branch, it had to be in the single digits, but bonuses were paid when you closed a week under 4%. Not many branches made bonuses regularly. Besides, people would pay the fees, and the company was trying to make as much money as they could from the service: I’m sure there was some research into fee amounts to find out how much people would willingly pay.
I hope I answered your question, but if not, I’ll provide as much information as I can - I haven’t worked for them since 2000, so regulations have likely changed, but the basic ideas are the same.
They can charge those rates because the people using them can’t/won’t/don’t get bank accounts and most likely not get a loan approved by a bank (aside from poorer people needing loans that are too small for a typical bank to want to deal with, literally, payday stores).
At least in my neighborhood, the people who use these stores are typically Mexicans who are either illegal aliens or working illegally (cash only jobs) who are wiring money back to their families. I’ve worked with people who are in some very depressed areas where banks won’t open for fear of 1) robbery and 2) not having enough profit potential. There has, in the past two years or so, been an increase of banks opening in grocery stores in these areas to serve the local population, allowing them to finally get a checking account, ATM usage, larger-than-payday loans, etc. I understand that the rates they charge are somewhat more than the bank a middle-class person would use, but significantly less than payday loan store usury.
Also, don’t forget car dealerships and extending their loan lengths (whatever the technical term is) at lower rates to greatly increase their total take when the loan finally gets paid off.
Well, the simple answer is because this is what the market will bear. If they were charging more than people were willing to pay, they’d go out of business.
Of course, the next question is: Why do people pay these rates? This answer has as many answers as there are customers. But what people are really buying with their 5% fee is access to cash, right now, no questions asked. Banks, mortgage companies, etc go to great lengths to determine your creditworthiness (or lack thereof). A few blemishes on your record get you a higher interest rate, smaller loan or rejection. In exchange for whittling down their customer base to people who are fairly likely to repay the loan, banks and mortgage companies can charge low rates.
The check-cashing stores (and pawn shops) are also in the loan business. With the check cashers, it’s a VERY short-term loan, but still a loan (they give you cash now, but don’t get the money themselves until the check clears). Since literally anyone off the street can walk in and cash a check, they don’t know anything about the person they are lending money too. To cover the inevitable defaults, they charge a higher fee for the loan.
::D’oh! Preview is your friend!! ::
As stated in that link, a lot of merchandise at pawnshops never gets reclaimed, or the original transaction was just a sale, rather than a loan (sometimes, a pawnshop will offer you more for an outright sale instead of a loan). If you really know how to judge the value of specialty merchandise, pawnshops can be good deals - I once bought a good condenser microphone at one very cheap. It just needed a battery. I don’t think the pawnshop owner knew it TOOK a battery and thought it didn’t work. On the other hand, you could also get taken to the cleaners, particularly buying things like jewelry and watches without adequate ability to judge the merchandise.
Many pawnshops are independent operations. There have been some attempts to franchise them, which seems like an attractive idea - if a single corporation operated a chain of pawnshops, it seems to me that you would be able to shift merchandise between stores to alleviate surpluses of a particular type of stock in a particular area, or make bulk deals to unload merchandise. Doesn’t seem to work that way, though.
I wonder what effect ebay has had on the pawnbroking business …
Actually, we’ve been here before, and I’m repeating myself:
http://boards.straightdope.com/sdmb/showthread.php?s=&threadid=99256
There used to be a pawnbroker on these boards, who went by the name Userer. He hasn’t posted since mid-2001, though.
365%? I thought the 21% interest on my overdraft protection was excessive, but 365% is unholy. (Overdraft protection is essentially a payday loan for the middle class, so I thought the interest would at least be on the same order of magnitude.)
How prevalent are check-cashing stores in the US? There are quite a lot of them here, but I’ve heard that opening a checking account is extremely difficult in the US. American banks seem less willing overall to do anything that might involve a slight element of risk. I knew someone who had been making 60-70k for at least a few years and couldn’t open a checking account. And I know someone else – not sure what they make, but they work for the postal service – who got a credit card with a $200 limit. Canadian banks are willing to open checking accounts for almost anyone, with no real questions besides asking for identification. I could have gotten a credit card with a limit well over $200 even when I was a student.
Which is not to say Canada has no poverty industry – as I said, there are a lot of check-cashing stores, but with the way checking accounts are in the US I’d expect them to be as prevalent as bank machines. One thing that hasn’t been mentioned but that I’ve recently encountered is companies that specialize in low-income apartments – ‘slumlords’, I guess. Apartment listings are full of ads for 2-bedroom apartments in the CAD700-800 range. The ads are flashy and loud, and they play down the slumness of the building. They use a nearby intersection rather than the name of the neighborhood, while apartments in more affluent areas will name the neighborhood prominently. They emphasize things of importance to low-income people, such as subway or bus access and the proximity to discount grocery stores rather than Starbucks or a theater. Most disturbing are the pictures the ads usually contain. Nearly all apartment ads have seemingly innocuous pictures of happy, smiling people – it doesn’t take long to realize those people represent the advertiser’s target market. If they want educated 25-30 year olds without kids, they show educated 25-30 year olds without kids. If they want low-income families, they show pictures of non-whites. Sometimes the non-whites are ethnically diverse, sometimes they’re not. Often there are several different phone numbers offering service in various languages. Anyway, this seems highly exploitative – I realize that many immigrant families have low incomes but I don’t think it’s right for slumlords to openly advertise to them.
Or, the loan is defaulted on because the dealer talked the customer into buying a car they couldn’t afford, it’s repossessed, goes back to the dealer and gets sold to the next sucker.
Well, check-cashing companies are different from payday loan companies, although either one might offer both services.
A check cashing company charges a fee (usually a percentage of the check’s value) to cash a third party check - this may be a paycheck, a tax return or whatnot. A payday loan is what I described in my post above. Both cater to the same general clientele, although for a payday loan company, the customer must have a checking account (that check is the basis for the loan), while many of the clients at the check cashing companies do not have or cannot get checking accounts.
I’m not sure of the prevelance of check cashing places in the U.S… I do know that payday loan companies have become increasingly apparent in a variety of states, and the industry is regulated by each state (at one point in my career there I had to keep up with the laws as they pertained to seven different states). Whether they can operate in each state depends on how that state has set up their usury laws - and how quickly that state moves in to regulate them once the payday loan places move in (the regulation usually caps the amount of interest/fees that can be charged, the length of the loan and things like that). But just as an example, Advance America (this is not the company I worked for, just one of the more widespread companies), claims to have “more than 2,000 locations in 25 states”.
I’ve never heard that it’s particularly hard to open a checking account in the U.S. While I’ve had several, I haven’t opened a new one in years.
How difficult is it?
I dunno, when I opened one, all I did was present some ID and answer some questions (this was 2 years ago).
However, I remember reading somewhere that there’s some kind of system all the banks use, so if you stiff/write tons of bad checks/whatever, all the banks’ll know it and won’t let you open an account.
Re: Preview reply: you’d think I’d learn too…
Re: Opening a checking account.
I opened a bank account with a check for $1,000 from another bank. My brother opened one with a paycheck. I think we might have had to wait until the check clearned, but other than ID, there was nothing special neeed.
In my experience (Chicago, being a big metro area), the banks are falling over themselves to get people to sign up for new checking accounts. Then come the ads for mortgages, CDs, mutual funds/money markets…the checking (or savings accounts) are essentially loss-leaders to get an individual “tied” to a particular bank so the bank can have an easier time selling other services. Keeping the consumer as much as possible in front of the bank’s ads is one reason many are starting to (again, in my experience) do things like offer/encourage going in to talk to your account rep, or even using the teller instead of the ATM. The only exception I can think of is Citibank.
I’d imagine that since we can argue that America’s run on debt, this is the way that all banks operate.
I think that check cashing stores, as discrete businesses, are not so prevalent anymore as they can make more money by selling you things like payday loans, so they combine the functions. Similar to the bank, they try to keep everything in front of you so you may decide to use those other services sometime.
I wonder if you do go to cash your check if they ask if you’d “like a payday loan with that.”
Well, I’ll be damned. The Chicago Tribune has an article on payday loans in today’s edition (Business Section, Page 8 “Short-term payday loans cast a long shadow”)
Highlights include:
It’s about a $25,000,000,000/yr. industry.
90% of loans made to repeat borrowers (who often have to refinance the same loan multiple times)
“To get a payday loan, the borrower must have a job and a checking account. The borrower shows the lender a pay stub–to prove he or she has a job and thus will get some cash within two weeks–and then writes a post-dated check to the lender. The check, which is for the amount of the loan plus a fee that usually amounts to 15 percent of the loan amount, serves as security for the loan.”
Rates typically range from 391% - 443% annually.
“Payday lenders get around state usury laws by characterizing the cost as a fee.”
If that helps…
Shoot, what’s typical loan shark vig?
Just in case anyone wants to read the article, it’s available online here (registration required, free).