Students Make $100 Financial Mistake: Very Alarming!

This story comes from the Arizona Republic as part of the general effort to maintain the ban on payday loan companies passed earlier this year (their is a proposition on the ballot in November to overturn the ban).

At least 5 percent of last year's freshmen at the University of Arizona obtained a payday loan, a figure the surveyor described as "very alarming."

Arizona's Norton School of Family and Consumer Sciences conducted
the survey, which measured the financial habits of 2,172 freshmen -
about a third of the class - who enrolled in fall 2007.

Student use of payday loans
more than doubled based on a survey taken a year ago that included
freshmen through seniors, said professor Soyeon Shim, the group's

"As consumers, students shouldn't be using payday loans as a resort to deal with financial stress," Shim said.

I wouldn't really recommend that students use this expensive form of ready cash, but I can't say I am particularly alarmed.  How can any of us know what pressures they are under.  In most circumstances, paying a 30% interest rate seems too high.  But I know, from personal experience, there are times when short term liquidity is so valuable you might pay anything for it  (just look - the American taxpayers are paying about a trillion dollars this year just for short-term liquidity).

In fact, if students have a bad experience, it's probably better to learn a $100 life lesson in college rather than a $500,000 life lesson later flipping condos on interest-only loans.  I personally had my own caveat emptor eye-opener with Columbia House Records in college.  Nothing like getting stuck with a couple of over-priced America albums to teach financial horse sense.  Muskrat Love... aaaarrrggghhh!

Anyway, the effort to ban payday loans altogether is one of those elitist, snobby, holier-than-thou, we're smarter than you unwashed masses issues.  Middle class homeowners who are upside down in their mortgages are not calling for inexpensive mortgages to be banned, they just want a government bailout.  The government may spend a trillion dollars in the end supporting the mortgage market.  But if poor people pay a high fee for a $100 loan, we have to ban the whole industry. 

The fact is that there is always a demand for ready cash at high interest rates, and if you drive it under ground, people just go to Tony Soprano instead. 

Oh, but you are not for banning payday loans, you just think the interest rates are too high, and that what is needed is government regulation of the rates?  Uh, OK, I'm sure that will go well.  Past government efforts to reduce the interest rate premium for risk have worked out really well *cough* mortgages *cough*. 

But, if you are still thinking that you are much smarter in money management than people who go to payday loan stores and you really want to use the coercive power of government to force poor people to make the same decisions you would, here's this:

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.


  1. Bill:

    I agree. Even somebody with a credit score of over 700 cannot walk into a bank, present a pay stub showing they make $750 per week after taxes, and then ask for a $200 three day loan at 10 percent. The bank would not agree to go through the hassle of spending 20 minutes or more to make a potential 5 cents profit. The bank employee's time would be better spent looking for change in the parking lot.

    That being said, some pay day loan places engage in illegal threats, usually based on threatening to sue based on the "bad" post-dated check that the borrower writes upon receiving the loan. Many times these threats include actions that can only be taken against someone who writes a "bad" currently dated check. That's no reason to shut down the whole industry though. Instead, sick the plaintiff's class action lawyers on lenders who are cheating a lot of people a little bit. That is literally what they're for.

  2. Jim Collins:

    Bill's comment reminds me of the joke about the guy putting up his Rolls Royce as security for a $50,000 loan. The bank takes the car and the guy leaves. He comes back in two weeks and repays the $50,000 plus about $50 in interest. The banker says that he checked the guy's credit and found out that he was quite wealthy, so why did he need the loan? The guy replies "Do you know of any place else that he could obtain secure parking for his Rolls for two weeks for only $50?"

  3. Brian:

    I agree government shouldn't take it over completely, but maybe we could find some sort of the middle of the road solution. Maybe create private corporation, backed by the government, to service these loans. We could name it Tony Mae.

  4. nicole:

    This seems especially stupid to me, given that I was much more likely to need the use of something like this as a student than at any other time. I'm sure I am not the only one who has spent approximately the first two weeks of a semester waiting on a student loan or scholarship check to arrive and/or clear, with zero other recourse. And I went to uni abroad, where any check drawn on a US bank would have taken 30 business days to clear--but sometimes you need groceries sooner than that. Liquidity is very valuable.

  5. Payday loan:

    The charges on Payday loans are less expensive than bouncing a check or paying late fees. It's also a great option for someone who 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.

  6. Dr. T:

    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%...

    In the example given, you pay $78 a year for the privilege of withdrawing $2,080 of your money in $40 weekly increments. This scenario is not analgous to borrowing money for short periods at high interest rates.

    Banks, at present, do not serve the very short-term borrower. They could do so by charging a high annual interest rate and a loan processing fee. Someone could borrow $500 for two weeks at 12% annual interest and a $75 fee. The total cost of the loan to the borrower would $100. Small local banks might do well with this, and I believe this would be legal in most states.

  7. dave smith:

    Brian, you are Effing funny.

    Made my day.

  8. Craig:

    Usury laws and "consumer-protection" regulation of credit sales led to the growth of the truly predatory rent-to-own chains. Local merchants were replaced with national chains charging as much as 100% annual interest. More unintended consequences.

  9. payday loans:

    though some critisize payday loans i find them very helpful. even if your not in dire need of money it is nice to have just a little extra. check city is a great company, and on average they are even 40% cheaper than the competition. they offer great paydown plans that most other lenders wouldnt even think of offering to their customers.

  10. David Z:

    Another thing to think about with payday loans, is, what is the opportunity cost of *not* taking one? If, as a result of not taking a payday loan, you overdraft your checking account by $100, the bank will charge you somewhere between $30 and $40. If, as a result of not taking a payday loan, you miss your credit card payment date, *BAM* you're assessed a late fee on the order of $30 minimum, and usually sent into a penalty rate that is in the neighborhood of 28%+

    I've gotten burned by both of these in the past. I have never taken a payday loan, but I understand that there are circumstances where it's unequivocally preferable to the alternative(s).

  11. [shameless self-promoter]:

    though some critisize [businesses in my industry] i find them very helpful. even if your not in dire need of [my product] it is nice to have just a little extra. [my business] is a great company, and on average they are even 40% cheaper than the competition. they offer great [products] that most other [competitors] wouldnt even think of offering to their customers.

  12. Lisa P:

    After the long day months of the campaign about the presidential election of the long run candidacy of the Obama Presidential election let see and watch what will happened next.
    The election is over and America has appointed a new leader. The people have chosen “change” by electing Barack Obama for the next President of the United States. Whether the United States changes for the better or for the worse, there is no doubt that change is in store for our country. It’s clear that Americans believe Obama will bring a positive change to our country. We’ve heard many of the promises he has made to the U.S. from lowering taxes for the middle class to putting a timeline on the war in Iraq and trimming the federal budget “line by line.” However, Obama also supports the elimination of the payday loan industry. He believes that eradicating the payday loan industry will protect low-income and families in general from falling victims to predatory lenders. On higher ground, it will be a violation to our financial freedom if the option to utilize affordable payday loans is wiped out. Threatening our rights to financial freedom is not a great start to creating positive change.
    Click to read more on Payday Loans