Restricting Credit to the Unsophisticated -- And Are You Really Any Better?
After years of arguing that expanded credit is critical for the poor, and attacking banks for "red-lining" poor and minority districts, the liberal-left of this country has reversed directions, and has decided that the poor can't handle credit.
No matter how much folks want to paint the recent mortgage problem as some sort of fraud perptrated on homeowners, the fact of the matter is that in large part, lenders lowered their income standards and a lot of those folks now can't pay. While we have yet to see any specific legislation beyond bailouts, it is impossible for me to imagine any reaction-regulation that does not have the consequence (intended or not) of restricting credit to the poor.
But these restrictions are not limited to the housing market. Many states, for example, are cracking down and even outright banning payday loan companies, often the last resort (legal) credit source before people turn to the loansharks. First in Ohio (via Mises Blog)
If Ohio's 1,600 payday-lending stores want to continue operating past this fall, it
appears they will have to find something else to offer besides payday loans.A hotly debated bill that effectively would spell the end of the short-term,
high-interest payday-lending industry in Ohio sailed through the Ohio Senate yesterday despite
pleas from lenders that their stores would close and 6,000 employees would be put out of work.The Senate was unable to find a compromise that both satisfied payday lenders and
eliminated the debt trap that bill supporters said forced too many borrowers to take out new loans
to pay for old ones. So it did what the House did last month: dropped the hammer."I think everybody said there is just no way to redeem this product. It's
fundamentally flawed," Bill Faith, a leader of the Ohio Coalition for Responsible Lending, said of
the twoweek loans. The industry "drew a line in the sand, and the legislature kicked the line aside
and said we're done with this toxic product."
And perhaps soon in Arizona. Yes, the interest rates are astonishing, though the dollars involved are seldom huge for the short life and small size of the loan. And, as an extra added bonus, Tony Soprano does not send someone to break your legs if you don't pay (the Sopranos being the only alternative provider once payday loan companies are illegal).
So, for those of you oppose payday loans, you are welcome to comment below about what a bad idea they are. However, I challenge folks to criticize payday loans without simultaneously implicitly expressing disdain for the intelligence of payday loan customers, or trumpeting your ability to make better decisions for payday loan customers than they can make for themselves.
However, for those who think they are ever so much smarter than payday loan customers, who are charged a lot of money for small liquidity boosts, consider this: Let's say you take out $40 each week from an ATM to keep you liquid and that the ATM fee is $1.50. You are therefore spending $1.50 or 3.75% for a one week liquidity boost of $40, which you must again refresh next week. Annualized, you are effectively paying 195% to get liquid with your own money. For this kind of vig, at least payday loan customers are getting the use of someone else's money.
MJL:
RE: ATM fees as an implicit loan rate
That's why the cognoscenti join a credit union that has reciprocal agreements with other FCUs to provide fee-less ATM access to the whole customer base. Works for me.
June 4, 2008, 2:56 pmRolo Tomasi:
That ATM example is great, I think I'll use it the next time a payday loan argument comes up. Also, I find it outrageous when the likes of Gov. Arnold try think they know what's best for other peoples finances, California's budget gap is $16 Billion! The government is the last place to go for advice on borrowing money.
June 4, 2008, 2:57 pmDr. T:
The ATM example is wrong, because you aren't getting $40 of liquidity per year, you are getting $2080 per year with total fees of $78 (3.75%). The fees aren't really interest: they are convenience fees so you don't have to waste time and fuel driving to a bank branch.
I still agree that payday loan centers should be legal, just as I agree that most of the people who use them are foolish about money.
June 4, 2008, 4:20 pmBill:
Nice to see that we aren't alone on the west coast with a legislature that is sure that it knows what is best for the "little people."
I bet the legislative critters pushing this really think they are doing great things while they push the working poor out of the lifeboat. Yes, you need to manage your money better (or make more of it) if you need these payday loans. But what do they think these folks will do after they are cut off?
June 4, 2008, 5:18 pmJoe:
Can you accept that SOME number of payday loan offices intend to loan people money they won't pay back in anticipation of the fees, and penalties? That to some extent they count on many of their customers making the payment on loan 1 by taking out load 2? Is your *only* solution to let the buyer beware?
June 4, 2008, 5:45 pmBrandon Berg:
Dr. T:
The fees aren't really interest: they are convenience fees so you don't have to waste time and fuel driving to a bank branch.
That's the whole point. Payday loan fees aren't interest, either--they're processing fees. With any loan, there are three components to the APR: Interest, processing fee, and risk premium. With a large, secured, long-term loan like a mortgage, interest dominates the other two components.
But with small, unsecured, short-term loans, processing fees dominate the total cost. Lending $400 for two weeks at an APR of 10% gives a return of about $1.50. Even if there's no risk of default, that's not going to be enough to pay the rent and utilities, hire staff, etc. Most of the cost is processing fees, followed by risk premium, and finally interest.
June 4, 2008, 6:18 pmMorgan Dubiel:
What is the most shocking is just how ignorant politicians are of the needs of the populace they serve. No one is forced to get a payday loan. It is a free will transaction. Without these types of businesses what opportunities are there for the poor or working poor to get loans? Here is a typical scenario: to borrow $20 they will pay back $40 next pay day. That is an annual rate of 5200%. This is a real scenario from actual participants. It occurs all the time. Payday loans are a bargain.
What the pols are really saying to the clients of payday loan programs is "go without". You don't need it or go to the black market and get it. These decisions are typical of the feel good solutions in which the cure is the poison. Like doctors we should demand that our "governing class" first do no harm.
June 4, 2008, 7:24 pmMorgan Dubiel:
What is the most shocking is just how ignorant politicians are of the needs of the populace they serve. No one is forced to get a payday loan. It is a free will transaction. Without these types of businesses what opportunities are there for the poor or working poor to get loans? Here is a typical scenario: to borrow $20 they will pay back $40 next pay day. That is an annual rate of 5200%. This is a real scenario from actual participants. It occurs all the time. Payday loans are a bargain.
What the pols are really saying to the clients of payday loan programs is "go without". You don't need it or go to the black market and get it. These decisions are typical of the feel good solutions in which the cure is the poison. Like doctors we should demand that our "governing class" first do no harm.
June 4, 2008, 7:25 pmJim Hart:
FIAT MONEY... The only organization besides the FED who's figured out how to leverage it appropriately is organized crime (the mob)..(I know, I know, redundant right? The FED also conducts organized crime) Who do you think invented the sub-prime mortgage market? Of course it was the loan sharks trying to launder their money. Ha.... Like they are really worried about Countrywide going broke now.
June 4, 2008, 8:25 pmMike:
It's amazing how many coworkers jump so easily onto the "payday loans are evil and thus must be eliminated/regulated" bandwagon. What about banks and credit card rates? Back in the days when I lived in apartments, each time I moved I would have to use a cashier's check to pay the deposits. Having a bank account, I naturally went to the bank to get these checks.
The bank charged $4. The bank upset me, so I decided to try an online based bank. I ended up keeping both accounts for over a year, because I feared not having the ability to get a cashier's check when I needed one. I heard that you could get one from the supermarket. Assuming that supermarkets were in the business of food, not money, I thought their fees would be higher.
One day, I decided to go to the supermarket to get a cashier's check. I was pleasantly surprised. I don't remember the fee, but it was less than $1. WOW! I closed my local bank account and have used the online ever since. I have since opened a checking account at a local bank, only because they now hold my mortgage loan, so the checking account is free no matter what.
What's the point of my comment? The $4 is stupid. But I learned that, and I found an alternative. I would like to hear from the people who were literally saved by payday loan stores. I believe they are the "silent majority". By limiting the choices of stores, limits competition.
June 5, 2008, 4:17 amjhc:
One factor behind the rise of payday loan companies was the change in rules for credit union lending. This is the story according to a guy who used to work for me. He had run a credit union before switching careers.
Prior to the Keating 5 S&L bailout mess, credit unions were able to give members unsecured short-term loans. So members could get a 'payday loan' at fairly reasonable rates from their CUs. Then the S&L bailout caused a change in regulations such that CUs could no longer give unsecured loans, regardless of size. Naturally they stopped making small loans because of the paperwork overhead.
Since the market abhors a vacuum, the payday loan companies stepped in to fill that niche.
Brought to you by the Law of Unintended Consequences...
June 5, 2008, 8:08 amRocky Mountain:
I don't really understand the way the payday loan works so someone please explain it. But let me make a guess. Joe Workingstiff has got some bills and day-to-day expenses coming up that he can't meet fully until he gets his check. So to be able to meet his upcoming obligations he goes to Bob's Friendly Payday Loan Corp. and shows a pay stub from an earlier paycheck and gets a short term loan - is this more or less in line with how it works? What other security does Joe have to offer other then a stub and an ID?
In truth this sounds like a very bad deal if people are getting in another hole because of the way the loan works. It's all good enough to talk about "the little people" being able handle themselves, but I see so many people walking around my little home town that appear to be absolutely baffled by all the new technology flying around that a neon sign promising $$$$ is like a moth to flame. The people commenting herein should try and remember there is another class of people that can't "run the numbers" like you can and they can be pretty easily exploited. Yes, there are some who figure things out but by the time they do the bagmen have built their McMansion.
The other thing I would ask is that if the "little people" are so capable then why are they getting into this fix at the rate which makes it possible for other more capable people to exercise their freedom by stuffing their pockets?
People on this blog are fond of pointing out government incompetence, thievery, and perfidy but it seems difficult for you to imagine that a private sector effort could be equally criticized.
June 5, 2008, 9:44 amFaxless Payday Loans:
Faxless Payday Loans are readily available to help you financially until your next payday without the hassle of filling out all the forms a bank would require
June 5, 2008, 9:59 ampayday loans:
i think payday loans are good just to help out in between paychecks
June 5, 2008, 12:40 pmReformed Republican:
However, I challenge folks to criticize payday loans without simultaneously implicitly expressing disdain for the intelligence of payday loan customers,
The people commenting herein should try and remember there is another class of people that can't "run the numbers" like you can and they can be pretty easily exploited
*snicker*
June 5, 2008, 12:48 pmPayday loans:
The charges on Payday loans can add up, if someone doesn’t pay on time. Other than that, it’s a good option for someone that doesn’t want to get caught up with credit cards debts. They can also help in a tight situation, its quick, and most places are open longer hours than banks.
June 6, 2008, 6:45 pmpayday loans:
I think the payday loan system is great! Theres not a single person who doesn't have emergancy's and payday loans really help out.
June 7, 2008, 8:58 amThere quick and easy and really do help.
no fax payday loan-david:
Regarding no fax payday loans, first hand experience has convinced me that it really is fast, convenient and hassle-free. But I think that the people who want to make use of it should be responsible and sure that they can afford to repay the loan come next payday. They must be able to keep their ends of the deal. This is the way to go if you want to make use of a payday loan successfully. Now about those people who are happy with their payday loans, read their testimonies here. http://personalmoneystore.com/moneyblog/
August 13, 2008, 11:58 pmno fax payday loan-david:
Regarding no fax payday loans, first hand experience has convinced me that it really is fast, convenient and hassle-free. But I think that the people who want to make use of it should be responsible and sure that they can afford to repay the loan come next payday. They must be able to keep their ends of the deal. This is the way to go if you want to make use of a payday loan successfully. Now about those people who are happy with their payday loans, read their testimonies here. http://personalmoneystore.com/moneyblog/
August 14, 2008, 12:32 amno fax payday loan-david:
Speaking of huge interest rates, banks charge them too. And what about overdraft fees? Those things are unfair too. Some payday loan companies even charge low fees so they are actually cheaper than banks. To learn more about this issue read the article here. http://personalmoneystore.com/moneyblog/2008/08/04/banks-caught-lying-about-the-payday-loan-industry-the-real-predatory-lenders-part-i/#comments You’ll be surprised with what you’ll find out.
August 16, 2008, 3:06 amno fax payday loan-david:
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August 17, 2008, 11:55 pmPayday Loan Advocate:
Payday loan customers applaud the payday loan industry mainly because, when used properly, they are the fastest and safest way to get out of an unexpected financial fallback. An old saying asks the question, "If something isn’t broken, than why fix it?" This is a perfect question to direct to many politicians who are attempting to or have outlawed the entire industry in many states. Of course, many people who are living beyond financial wealth would agree with this action and bond to fix something that isn’t broken. They have even inspired presidential hopeful, Barack Obama, to join their inexplicable motion. On November 4, vote for the peoples’ right to financial freedom and independence.
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Erica:
I think that payday loan stores should continue to exist. But I also think people who abuse them, credit cards or any other type of loan should not be allowed to ask for help when they get into trouble, they should not be allowed to declard baankruptcy and make everyone who didn't act stupidly pay for them.
October 8, 2008, 4:02 pmPayday Loan Advocate:
Those who depend upon the availability of payday loans for unexpected emergency expenses they hadn’t budgeted for must speak up this election day. We cannot allow Ohio’s HB 545 to take away the financial freedom we have, and have been fighting for. This House Bill is not a Robin Hood that will “steal from the rich and give to the poor.†In actuality, it is more like the Sheriff of Nottingham appointing more vassals. Other financial institutions, such as banks and credit unions, are certainly pleased to support such measures for they seek to snatch up the business payday lenders who have been squeezed out of business will leave. Moreover, they will subject consumers to a product that will be even more profitable for banks: overdraft fees. They strive to magnify the “horrifying†391 percent APR on faxless payday loans, but overdraft protection typically costs in excess of 1,000 percent APR. This further proves their gluttonous intentions to overwrite every other financial institution, like the payday loan industry, and become consumers’ only option when unexpected financial fallbacks occur. Bear in mind that payday loans are typically only two-week loans to begin with, so it’s no doubt a circle and stripe argument. Plus, voting NO on HB 545 will prevent the annihilation of about 6,000 jobs in Ohio, which will support the further destruction to an already suffering economy. Odds are that many who lose their jobs because of the government overregulation will be forced to work and/or live outside of Ohio, which will definitely create a tax and spending power deficit for the state. In conclusion, if you want to help fix your state’s economy and value your rights to financial freedom, vote NO on HB 545.
October 30, 2008, 1:47 amPost Courtesy of Personal Money Store
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Payday Loan Advocate:
We already know that lending is not a crime, and we all know that today generation we can not avoid to can not engage into a loan.
The bells are ringing; the Philadelphia Phillies have won the World Series 2008. It has been 28 years since their last victory when Mike Schmidt, Pete Rose and Steve Carlton showed the American League the meaning of spirited, winning baseball. Twenty-four-year-old Cole Hamels was named the World Series MVP in only his 3rd season in the Major Leagues. Victory roared across Philadelphia as emotions ran high while the city prepared the celebration of the boys bringing home the Commissioner’s Trophy. However, supporters of the community are also preparing for something else; mass rioting. Temple University recently sent out an email to its students detailing the many ways they will be arrested while they celebrate the Phillies World Championship. In the email they stated, “Students involved in vandalism, refusal to disperse, destruction of property, etc. will face both criminal and University disciplinary action. Sanctions may range from fines up to and including immediate suspension. Surveillance – including videotaping – is heightened during the Series on campus and throughout the city.â€
Is there really a need for police state crackdown? People should be more respectful; it’s the adult thing to do. However, if someone less respectful of property as you leaves you with a smashed windshield and you need help to take care of it before you’re paid again, affordable personal loans are available. Keep your spirits rolling with victory.
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