LOL!! Nothin’s too good for our boys in uniform, right? Thanks guys, for all your hard work in congress.
Jeeze louise, these people need to DIAF, the sooner the better.
I suggest the linked article, it’s serious and doesn’t play political games. If you loan somebody $500 for a week @36% APR that’s 10, assuming you count everything charged as being interest. There's a certain minimum of ‘s where the business makes any sense. And people pay several $1 fees every day to use ATMs’ other than their own bank’s and often to withdraw 100 or even less (I'm constantly after my kids not to do that when I see it on their bank statements when I do their taxes, but it's just not many 's). So should Congress mandate that certain transactions by payday lenders with military members be at a loss to the lenders, or just outlaw payday lenders? Some states effectively have in recent years. Hooray, they are finally looking out for the little guy…except then the people who used those lenders have nowhere to go.
And the issue isn’t really the rate, it’s whether people use that type of service as it is supposed to be, for short term unusual situations, or whether they keep significant balances for a long time, where the interest piles up into a really terrible deal. But the dilemma is that given the relatively high cost of running of those businesses per $ lent, and the high rate of people who don’t pay back the loans, the business probably requires a fair % of the people using it to get into such ‘debt traps’ in order to make it profitable enough to exist for the borrowers who use it responsibly.
It doesn’t seem to be a case of ‘capital earns too much, the govt has to legislate a lower return on capital, then it will be fine’. If the return on the payday loan business was really high, it doesn’t seem likely that 8 states could have driven the payday loan business into oblivion in just the last few years by tightening their usury laws. Those measures were presumably deemed to be reasonable ones to make the business more ‘fair’, not intended to wipe it out, but did wipe it out.
Easy situations with easy villains to bash are always preferred in politics, but real life especially economic life is usually more complicated.
What’s so complicated about it? 36% is fucking highway robbery. The lies that are spun to try and justify this, those get pretty convoluted.
36% per year is 3% per month or around 0.7% per week. These are short term loans - if you need $100 for a week but it’s worth less than a dollar to the lender they can’t afford to photocopy your driver’s license much less pay someone to prepare a loan document.
This “highway robbery” requires much larger minimum amounts and longer terms for the lender to even cover their overhead and those both make it easier to accrue a financially ruinous string of ever increasing rollover loans.
Sure, a consumer can borrow that much larger minimum and put the excess amount in the bank for that much longer term and not touch it until it’s time to pay back the loan, but that takes a lot of willpower when you’re living check to check.
The industry is quick to point out that accruing a late fee and getting a utility shut off and paying to get reconnected is often more expensive than the original balance and way more expensive than their rates. Often times after being disconnected for nonpayment a consumer is required to pay a deposit of several hundred dollars in addition to those fees. Paying $20 or $30 or $50 for a temporary surge in cash flow can be an exceptional value compared to the alternative.
(Dodges flying beer bottles)
Just playing devil’s advocate!
It’s been explained, twice. If the loan is short term and small, 36% isn’t necessarily enough actual $'s to be worth anyone’s while. It’s not ‘spinning’ anything, it’s you not taking a moment to think it through.
I want to borrow $100 from you payable seven days from now. How much will you charge me?
(Assume you are in the business of lending money, not helping me out with any act of charity, and I have a 500 credit score)
I know in Utah the reason that payday loan places are legal and able to charge such high interest rates is to discourage loan sharks which tend to pray on the poor and disparate and have far worse penalties for failure to repay loans upto and including human trafficking and murder.
Not always true, a judge will like as not modify the contract to change the interest level to be legal rather than voiding it.
To follow up on this, even if you “only” charged me an effective APR of 26%, that means you could only charge $.50 for the loan.
Now, think of your costs. You have to pay the rent/mortgage on the buidling, pay utilities, pay employees, pay business taxes, and document and underwrite the loan process. Plus you have to factor the risk that a guy who needs to borrow $100 is going to default and you have to take collection efforts. Also you are in business to make a profit.
So, just going off a gut instinct, I would say I would make the loan for $10 (even though that might not be enough). That comes out to an astounding 5200% APR. Am I a loanshark or unethical?
The point is that there has always and will always be a demand for these short term loans. Society can choose to outlaw them and drive them underground, or realize that interest rates that apply to home mortgages and even credit cards do not translate well to this industry.
Payday loans of extremely high rates are illegal in some areas. Massachusetts has lawsthat make it very unattractive for payday loan companies to exist here.
How do companies get away with it? Well, a number of payday loan companies are run by Native Americans on tribal lands, which have different laws; company owners have held that the laws where the loan originates trumps the laws where the lendee lives. And many others are run by companies that are in foreign countries, which also have different laws (with ditto law-trumping as the NAs).
Sorry for the multiple posting, but I think many of the problems also come from the idea of fixed and variable costs. In any business transactions, whether for money or any other good or service, much of the cost to provide the good or service is fixed upfront and the variable costs for additional units are much smaller.
Suppose I need my grass cut. The yard boy or professional lawn service has certain fixed costs that apply no matter how large my yard is. He has to keep his equipment in working order, stock gasoline for the equipment, keep his vehicle in working order, and drive from his location to my location. Those costs are the same whether he is cutting 15 acres or a postage stamp lot.
If he is cutting 15 acres, then his fixed costs will likely be dwarfed by the variable costs of the time and expense he will incur at my place cutting all 15 acres. Conversely, if he is cutting my 15’ X 15’ porch stoop, his variable costs will be drawfed by the fixed costs.
It might only take him five minutes to cut such a small area, but he still charges me $20. Would anyone say that since he only did five minutes worth of work, his effective hourly rate was $240/hr which is an outrageous ripoff to a poor homeowner? That is more than doctors or lawyers charge per hour!
So then the nanny state comes up with a law that nobody can charge more than $60 per hour to cut grass. That is only fair to protect the poor and vulnerable. What happens then is that nobody can charge more than $5 to cut my small yard. Nobody will because they will probably lose money once wear and tear is accounted for on their equipment.
Then, I will be forced to cut my own grass or hire someone illegally under the table. I might have health problems or other life circumstances that make cutting my own grass impossible.
I am not saying that these payday loan places are desirable or a boost to the community. They are like pawn shops, bail bond agencies, strip clubs, seedy bars and liquor stores. To wish them away is a perfectly laudable goal, but history shows it to be an inacheivable goal with more dire consequences.
Further, the free market system can work. If you are convinced that these lenders are “preying” on poor people by charging “outrageous” rates, then open up your own lending shop charging only 1/2 or 1/4 the rates of your competitors. See everyone come to you and make a good living.
The discussion about whether 36% pa is ‘robbery’ is a tangent. Applying just a bit of common sense it becomes obvious that some limiting % per annum is not meaningful. The lender has to make a profit after fixed costs and given that the loan might be so small and short (36% pa on $500 for a week is ~$3) it might not be enough. OK that should be obvious IMO.
The real problem is this: as shown in the linked Atlantic article, it seems that payday lending is a pretty crappy business at almost any pa rate politicians are likely to allow (given the inevitable public knee jerk such as seen in the 36% case) unless a significant portion of the customers get into a debt trap, where they have to keep rolling over the loans and the high rates to compound on significant amounts over a significant time, to where it really is a terrible deal (and the rates, for example from the Native American run places you see on TV, are sometimes more like 100% pa, again ~$7 on $500 for a week but cripplingly high in the long run).
The profit on those people who get caught up in larger debt seems to be needed to allow the business to exist to lend to people who actually use the service as intended, t pay a few bucks in interest to cover an unexpected expense a few days to pay day, every once in a while. Nor is it easy for the blunt tool of regulation to allow the business, but prevent anybody getting into the debt trap.
The two actual policy outcomes seem to be states (now around 14) which tighten the laws till the business disappears, and the others were some people end up going under financially because they get into debt traps, but some people use the service as it’s intended and it make their lives a little easier. Also though as the article points out, no regulation at all tends to result in the same access to the system as some regulation, but higher rates. Price competition just doesn’t seem to occur much in this business: the prevailing rate tends to be the highest allowed whatever that is, where it’s not low enough to just extinguish the business, or else quite high if there’s no limit on the rate allowed.