Tuesday, August 16, 2011

Payday loans in Missouri

I saw some articles today about payday loans in Missouri and it touched me off. Seems that in Missouri there are "325 McDonald's restaurants, 157 Starbucks coffee outlets and 1,040 payday loan stores." (as of 2010. source: Bankrate article). Now my personal opinion is that Starbucks is overpriced, but I'm thinking 10 times as many Payday lending stores as Starbucks is a little much. And you can always get things on the dollar menu at McDonalds.

In reality, the article was NOT drawing a conclusion about the number of McDonalds and Starbucks vs payday lending, it was just comparing numbers in terms that most people can relate to. The goal is to get you to say "gee, that's way too many payday lending stores." So why would there be so many? Well to quote a well-known bank robber who was asked why he robbed banks - "because that's where the money is" (Wikipedia). Payday lenders flock to Missouri because they know they can make a good profit. "The APR allowed by Missouri’s statutes of 1,950% based on a two-week loan of $10" (BBB paper)

The same BBB paper indicates there are some nursing homes that have payday lending companies at the homes. The article doesn't mention if they loan money to the residents (let's hope not), but they do loan to workers, then allow them to pay back with payroll deductions. I'm reminded of the Tennessee Ernie Ford song "Sixteen Tons" which said "I owe my soul to the company store." (Video here)

Payday lending companies like to point out that they loan money to people who need quick cash. The loans are very short term and the APR doesn't really mean much, most loans aren't kept open for a year. They also point out that their fees are lower than past-due charges and overdraft fees. In my research about three years ago (see here), I showed that these companies need to charge these rates to stay in business.

However, three years ago I also compared payday loans to crack cocaine. They are just as addictive and just as dangerous. The BBB article calls them debt traps. A couple of years ago, I commented that "this conservative who prefers less government interference spoke in favor of more government regulation and less payday loans." (here) My position is unchanged.

I still believe that the best payday loan is your own payday loan. Put $500 in the bank for the emergencies that come up. When an emergency comes up, pull it out, then put it back just like a payday loan. You'll save yourself large fees and maybe even gain a little interest.

Comments, even opposing, are welcome and will be published as long as they do not contain profanity, address this subject and are directed to me. If you want to call me an idiot, that's fine, don't call my readers names. You can debate their comments, but I will not allow them to be mistreated. Posting your real name and email address is not required, but appreciated.

Previous posts in reverse chronological order:

5 comments:

4simpsons said...

"I still believe that the best payday loan is your own payday loan."

Well said! The whole payday loan business is sad. People just need to beat the cycle.

Anonymous said...

Why does it seem like the only folks who need these loans are the ones who can't afford them in the first place? Wait? Haven't I heard that before? Yes, yes yes, the lottery. I've heard that it's a tax on poor people...how many rich people do you know of that play the lottery? The point is that in both cases, those who have the least amount of money are the ones going to these places looking for a "quick fix". So yes, I do concur it is a trap.

I think, and it's only my opinion, that the best way to improve EVERYBODY's bottom line is to cut taxes. This not only puts businesses in better shape to hire more workers for better pay, but it also allows those earning that pay to better allocate it to their various needs/wants. This methodology might result in the closure of some of these "loan shark" places. I'm sorry-too bad. The greater good for the greater number is served more fully by the people making the money keeping as much of it as possible for their own use.

- a disgruntled Tea Party advocate

Randy said...

4simpsons, unfortunately, most people won't beat the cycle and will repeat it.

Anon, thanks for visiting and commenting. Hadn't thought about comparing these loans to the lottery, but I guess you're right. I wonder how many of the people that take out the loans also play the lottery? Would be an interesting stat.

Rico Flores said...

This was in the Columbia paper today: "A fiscal impact summary prepared by opponent Joseph Haslag — a University of Missouri economics professor and former director of the Show-Me Institute — estimates gross domestic product in the state would decrease by $57 million in the first year and $57.5 million the second year, resulting in lost tax revenues. Additionally, closing shops would force people out of work, costing the state an estimated $8 million in unemployment benefits the first year." Seems like the state loses money and the people working today won't be later.

Randy said...

Rico,
First of all, welcome to my blog, I don't think you've commented before. I always enjoy having new people visit.

You're correct, if Payday Loans are cut out, jobs will be lost. Some might argue that they just want to reduce Payday Loans, not eliminate them. However,if you read my links, you'll see that's a hollow argument, Payday loans NEED to charge those high fees to stay in business. Their ROI isn't as high as you might think (my suspicion is that's due to the default rate, but I haven't verified that).

That said, I still feel these placees should be closed down. In part 3 of my initial set of blogs, I compared payday loans to selling cocaine. That should be shut down too and people will lose jobs. But it's the right thing to do.

Again, thanks for visiting.