Wednesday, May 21, 2008

Any Day Pay Day, how about today - Part 2

This is the second in a three part series on payday loans. In the first part, I described the practice and shared some information from a business point of view. While the companies that
give these loans suffer a lot of criticism, their overall profitability is not outside the norm and
they are in a high-risk business (they have a lot of folks who walk away from their debts).

In this part, I intend to share information on what two states (Ohio & SC) are doing to curb pay-day loans and why. Thanks again to David for the tips on Ohio's proposed legislation. In the final part, I'll share my opinion.

I lump payday loans and title loans together, as you typically see these businesses side-by-side.
Title loans typically carry a higher loan amount (up to $1,000 in some cases) and are for longer
periods of time (30 days as opposed to two weeks). Of course, they hold the car title as collateral. According to bankrate.com, "the possible loss of your car makes (title) loans dangerous. If you lose your car, everything else just cascades... You can't access your job or health care and, therefore, you fall behind on other bills, and it makes life almost impossible."

In some states,lenders can only flip a title loan six times. In other states, there are no laws
that require the lender to reimburse the borrower for a car sold for more than what is owed on the original loan. So the lender can make money on your car in several ways.

Ohio and SC are taking steps to limit payday loans and car title loans. In reality, the steps are
designed to eliminate them all together. Ohio legislation is all but done (senate and house to work out details on already approved legislation and a governor who has already promised to sign it). In SC, the bill is all but dead (died in committee).

The legislation limits the amount of interest a lender can charge (Ohio 28%, SC 25%), limit the
number of loans a borrower can get in a year (Ohio 4/year, SC 1/week), and limit the amount of the loan (Ohio - $500, SC - $600). Ohio would also prevent lenders from taking the car title as collateral and sets the duration of the loans to not less than 31 days.

While this may sound like it only limits lenders, it effectively eliminates them. "Cash America International Inc said it expects to close its Ohio lending operations" due to the new legislation according to a Reuter's news article. Also, "Washington set a 24 percent cap on interest rates last fall, payday lenders left the city in droves" according to Christian Science Monitor

Why do critics feel this is necessary? Simple. "Research shows that the payday lending business model is designed to keep borrowers in debt" according to research by the Center for Responsible Lending. "Borrowers who receive five or more loans a year account for 90 percent of the lenders’ business." These companies prey on repeat borrowers and the legislation is designed to protect citizens.

Next post shows my opinion. Feel free to comment on this part, or the previous post.

6 comments:

4simpsons said...

The whole enterprise smacks of taking advantage of people, but I see the points about rates of return and defaults and such.

I suppose that as long as there is fair competition between the loan companies that it will drive the interest rates down to reasonable levels.

This is a reason I'm a big fan of Junior Achievement: We really need to teach kids money basics and how short-sighted and addictive this bad credit behavior is.

Randy said...

Thanks Neil. Part 3 is coming soon.

JA is a good program. Any tool we have to educate the youth is good. Now if I could only teach my teenager how to manage his checkbook....

mitch said...

Hey, I enjoyed your blog. Very informative. I agree completely. Keep up the good work. I think quick loans or " payday loans " can be very helpful at times. Especially when you have no no credit and no family to turn to. Sometimes you just have to do it. I'd rather be a little in debt, than homeless.

Randy said...

Mitch,
Thanks for stopping by. I appreciate your comments.

Being a little in debt is like being a little pregnant. My daddy always said "you either is, or you ain't."

A better alternative is to put a little money away for emergencies. I listen to Dave Ramsey and he suggests starting with $1000. For most people, I suggest starting with $500. That will keep you from becoming homeless in most cases.

Trista said...

Payday Loans are good when you are in a bind and need to catch up on your bills


Payday Loans

Randy said...

Thanks Trista for the comments. Seems I got a lot of attention on this post, many plugging the same website. Well at least I got attention, even if it's not unique attention.

I would think a better idea is to put away some money for when you get in a bind. Then you become your own payday lender. It just takes some discipline (which I admit isn't easy).

Of course, many will say that they can't put away that money, but then how will they ever repay the loan?

Thanks again.