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)
Showing posts with label Payday lending. Show all posts
Showing posts with label Payday lending. Show all posts
Tuesday, August 16, 2011
Sunday, March 13, 2011
Western Sky
Today I saw an ad for Westernsky.com. This is a company owned and operated by Native Americans. The ad offered about $2500 in a loan. They will put the money in your checking account overnight. No collateral is required and there are no fees for early pay off.
I was curious, this sounded suspiciously like payday loans I talked about here or the Cashwell company I talked about here. When I found their website, I saw that they claim to have lower rates than payday loans. From looking at their rates, they are lower than Cashwell.
But they aren't cheap. For a loan of $2525, you'll pay a $75 fee right off the bat. Then you start paying almost 140% in interest. If you pay it off over the required 36 months, you'll pay over $10,000.
The website explains that Western Sky operates "within the boundaries of the Cheyenne River Sioux Reservation, a sovereign nation located within the" USA. I don't know if that means they operate under different rules. I wonder if they can pursue US citizens who don't pay them in the same way US companies. Or maybe they get to play under US rules in some cases and their own rules in other cases.
It would scare me to work with a company that might not operate under US laws. It would scare me even more to pay 140% interest. (I should note that this was their least offensive loan. If you only borrow $1000, you'll pay almost 195% interest)
I was curious, this sounded suspiciously like payday loans I talked about here or the Cashwell company I talked about here. When I found their website, I saw that they claim to have lower rates than payday loans. From looking at their rates, they are lower than Cashwell.
But they aren't cheap. For a loan of $2525, you'll pay a $75 fee right off the bat. Then you start paying almost 140% in interest. If you pay it off over the required 36 months, you'll pay over $10,000.
The website explains that Western Sky operates "within the boundaries of the Cheyenne River Sioux Reservation, a sovereign nation located within the" USA. I don't know if that means they operate under different rules. I wonder if they can pursue US citizens who don't pay them in the same way US companies. Or maybe they get to play under US rules in some cases and their own rules in other cases.
It would scare me to work with a company that might not operate under US laws. It would scare me even more to pay 140% interest. (I should note that this was their least offensive loan. If you only borrow $1000, you'll pay almost 195% interest)
Tuesday, November 17, 2009
Is your cash well?
I recently saw an ad on TV for an installment loan from a company named CashWell. The ad went out of it's way to point out that this was NOT a payday loan, it was an installment loan with little or no paperwork. Sounds too good to be true, walk into a storefront and walk out with $1500 without a lot of paperwork or one of those nasty payday loans.
So, I checked into CashWell installment loans. According to this website, the rate on the loans can be as much as 248%. Rates are lower for higher loan amounts, but in my state the lowest rate is 207%. Say for example, you borrow $1000 and agree to pay it back on a bi-weekly basis over the course of the next year. My amortization schedule generated by Excel shows a payment of $92.20. At the end of the year you will have paid $2,397.11 for this loan. Not a bad return for CashWell.
I've spoken before about payday lending and it's cousin title lending (see here and previous posts). This new type of "installment" loan falls into the same category. At best, it's something to be avoided. At worst, it's something to be outlawed.
So, I checked into CashWell installment loans. According to this website, the rate on the loans can be as much as 248%. Rates are lower for higher loan amounts, but in my state the lowest rate is 207%. Say for example, you borrow $1000 and agree to pay it back on a bi-weekly basis over the course of the next year. My amortization schedule generated by Excel shows a payment of $92.20. At the end of the year you will have paid $2,397.11 for this loan. Not a bad return for CashWell.
I've spoken before about payday lending and it's cousin title lending (see here and previous posts). This new type of "installment" loan falls into the same category. At best, it's something to be avoided. At worst, it's something to be outlawed.
Tuesday, September 15, 2009
Debit cards and overdraft fees
Last night there was a story on NBC news about a young soldier, Private Cid, who was having problems with his bank debit card. Since a couple of my family members recently had similar problems, I felt like it was time to speak out. I did some research and found some potential answers, political and practical. This may be long, but I encourage you to read on.
It seems young Private Cid uses his debit card daily for a lot of small transactions. In fact, the video story can be found at this site (I just rewatched it) and it says the average debit card transaction is under $20. In one day Private Cid had five such transactions, for pizza, sandwiches and such totaling $33.41. Trouble was, he didn't have the money in the bank and encountered $175 in overdraft charges. In a single five month period, he had total overdraft charges of $1785. For a young army private, that's more than a month's salary.
Now the individual in this story is an army soldier which brings a special feeling of patriotism (no mention was made of where he's serving). But this could easily apply to my son or my daughter. And since I know a few people who recently faced similar situations, I paid special attention. Overdraft fees are a "cash cow" for the banks and they will make over $27BILLION with these fees. I can be somewhat cold sometimes (my kids think all the time) and I think the bank deserves to make a profit, but they don't have to make it all on me (or my family).
There are some proposals that may change the way these overdraft fees work. I tend to favor less legislation, but in this case, the banks have not been playing nice (even if they've been playing by the rules) and it's probably time to change the rules. However, changing the rules won't be 100% in favor of the consumer and the consumer is bound to lose some in the deal. For example, banks claim they pay these over-charges as a courtesy to consumers and that "6 percent of consumers were glad their charges were paid, despite the overdraft fee." Overdraft fees only affects about 18% of Americans (details on the legislation and the source for this is here -- do I get bonus points from liberals by quoting a newspaper with "democrat" in the name?).
But if you're counting on the government to bail you out of overdraft prison, you might be stuck for a while. So I have a simple solution and some alternatives to help you in the mean time. They do require a little discipline and I know that's hard to come by these days. One simple solution is to keep track of how much money is in your account and never go below $0. Only the government can keep spending when the balance reaches $0 and if you're not printing money in your spare room, you can't get away with it.
Another solution is to "hide" some money in your account. The amount depends on the most you charge in a given day. Say you regularly charge about $33.41 in a day like Private Cid. You put an extra $35 in your account and mentally subtract that from the balance each time you check it. For easier math, just make it $100. Then when your balance goes below $100, you think "Oh No, I've overdrawn" and you put it back. This requires some extra discipline because you have to make it a practice NOT to spend that $100.
Traditional banks sometimes offer "sweep" accounts, where you can have money in savings and have it "sweep" to checking when you overdraft. This, or a line of credit, will effectively do the same as "hidden" money. But these aren't always available to everyone.
Finally, I'll mention a new, high-tech way to help. This is especially relevant to the two people I know who recently had over $100 in overdraft fees, but also relevant to everyone. My bank of choice is BB&T. They offer "Alerts" on their website. In fact, I just signed up for alerts myself. You go to the website and specify that you want to be notified when your balance drops below a certain level (I chose $100). You can have it alert you when a deposit is made, or when a check clears. You can have it alert you when you get an NSF charge (that way you can STOP SPENDING). You can even have it send you your balance each day so you know how much you have to spend.
BB&T alerts are free and can be sent to your email or even your cellphone (normal text rates apply). You can specify what time of day the alerts are sent so you don't get woken up at 8am every day. While I don't intend this as a commercial for BB&T, I strongly encourage everyone (especially overdraft prone people) to find out what their bank offers.
* Update - my editor in chief (wife) pointed out that this doesn't always take in to account pending transactions. Also, I noticed that some alerts don't come out on weekends and holidays. You still have to have some personal responsibility. But this can help you manage your account.
It seems young Private Cid uses his debit card daily for a lot of small transactions. In fact, the video story can be found at this site (I just rewatched it) and it says the average debit card transaction is under $20. In one day Private Cid had five such transactions, for pizza, sandwiches and such totaling $33.41. Trouble was, he didn't have the money in the bank and encountered $175 in overdraft charges. In a single five month period, he had total overdraft charges of $1785. For a young army private, that's more than a month's salary.
Now the individual in this story is an army soldier which brings a special feeling of patriotism (no mention was made of where he's serving). But this could easily apply to my son or my daughter. And since I know a few people who recently faced similar situations, I paid special attention. Overdraft fees are a "cash cow" for the banks and they will make over $27BILLION with these fees. I can be somewhat cold sometimes (my kids think all the time) and I think the bank deserves to make a profit, but they don't have to make it all on me (or my family).
There are some proposals that may change the way these overdraft fees work. I tend to favor less legislation, but in this case, the banks have not been playing nice (even if they've been playing by the rules) and it's probably time to change the rules. However, changing the rules won't be 100% in favor of the consumer and the consumer is bound to lose some in the deal. For example, banks claim they pay these over-charges as a courtesy to consumers and that "6 percent of consumers were glad their charges were paid, despite the overdraft fee." Overdraft fees only affects about 18% of Americans (details on the legislation and the source for this is here -- do I get bonus points from liberals by quoting a newspaper with "democrat" in the name?).
But if you're counting on the government to bail you out of overdraft prison, you might be stuck for a while. So I have a simple solution and some alternatives to help you in the mean time. They do require a little discipline and I know that's hard to come by these days. One simple solution is to keep track of how much money is in your account and never go below $0. Only the government can keep spending when the balance reaches $0 and if you're not printing money in your spare room, you can't get away with it.
Another solution is to "hide" some money in your account. The amount depends on the most you charge in a given day. Say you regularly charge about $33.41 in a day like Private Cid. You put an extra $35 in your account and mentally subtract that from the balance each time you check it. For easier math, just make it $100. Then when your balance goes below $100, you think "Oh No, I've overdrawn" and you put it back. This requires some extra discipline because you have to make it a practice NOT to spend that $100.
Traditional banks sometimes offer "sweep" accounts, where you can have money in savings and have it "sweep" to checking when you overdraft. This, or a line of credit, will effectively do the same as "hidden" money. But these aren't always available to everyone.
Finally, I'll mention a new, high-tech way to help. This is especially relevant to the two people I know who recently had over $100 in overdraft fees, but also relevant to everyone. My bank of choice is BB&T. They offer "Alerts" on their website. In fact, I just signed up for alerts myself. You go to the website and specify that you want to be notified when your balance drops below a certain level (I chose $100). You can have it alert you when a deposit is made, or when a check clears. You can have it alert you when you get an NSF charge (that way you can STOP SPENDING). You can even have it send you your balance each day so you know how much you have to spend.
BB&T alerts are free and can be sent to your email or even your cellphone (normal text rates apply). You can specify what time of day the alerts are sent so you don't get woken up at 8am every day. While I don't intend this as a commercial for BB&T, I strongly encourage everyone (especially overdraft prone people) to find out what their bank offers.
* Update - my editor in chief (wife) pointed out that this doesn't always take in to account pending transactions. Also, I noticed that some alerts don't come out on weekends and holidays. You still have to have some personal responsibility. But this can help you manage your account.
Sunday, June 14, 2009
Anyday payday, how about today - revisited
Last May (slightly over a year ago), I did a three part series on Payday lending. In the first part (here), I talked about the business and some of the requirements for the business. In the second part (here), I talked about what two states (SC & Ohio) were doing to try to stop the business and in the final part (here), I gave my opinion.
I won't rehash all that was said back then, but I will say that this conservative who prefers less government interference spoke in favor of more government regulation and less payday loans. If you're interested in the details, go back and read those articles. I'll be glad to answer any posts.
Since that time, Ohio passed new legislation aimed at killing the Payday loan industry. The industry used loopholes in the law and kept working. SC failed to pass any legislation, but this year tried again. The legislation passed, however, it was vetoed by Governor Sanford.
According to the Greenville News, "The regulations this bill would place on payday lending would not force the lenders out of business." Of course if you read my initial posts, you'll see that this only partly true, Payday lending can't survive outside its current business model. The bill would have limited the loans to $550 and "consumers would be prohibited from having more than one payday loan outstanding at any given time." There would also be "a one-day waiting period would be established between loans for the first eight loans, with a two-day waiting period on any loans beyond that." This would keep borrowers from paying off one of the loans with a new one. "A statewide database would be created to track who is eligible for payday loans."
All of this seems reasonable. However, the governor disagreed. He said "it is this administration's abiding belief that government's role is not to protect people from their own actions." (Newark Advocate). He also said "he recession leaves consumers needing the ability to get access to cash to avoid eviction, foreclosure, bankruptcy and having their lights turned off."
The bill had an unexpected advocate - Advance America. Now you may be surprised that a payday lending company would support the bill. They said the bill "would have provided consumers who choose to use the cash advance product in South Carolina with comprehensive reforms and protections." (Charleston Regional Business Journal) Advance America realizes that if the bill had succeeded, it would have been free to continue to compete, while smaller companies may have had trouble with the new legislation.
Remember, 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.
I won't rehash all that was said back then, but I will say that this conservative who prefers less government interference spoke in favor of more government regulation and less payday loans. If you're interested in the details, go back and read those articles. I'll be glad to answer any posts.
Since that time, Ohio passed new legislation aimed at killing the Payday loan industry. The industry used loopholes in the law and kept working. SC failed to pass any legislation, but this year tried again. The legislation passed, however, it was vetoed by Governor Sanford.
According to the Greenville News, "The regulations this bill would place on payday lending would not force the lenders out of business." Of course if you read my initial posts, you'll see that this only partly true, Payday lending can't survive outside its current business model. The bill would have limited the loans to $550 and "consumers would be prohibited from having more than one payday loan outstanding at any given time." There would also be "a one-day waiting period would be established between loans for the first eight loans, with a two-day waiting period on any loans beyond that." This would keep borrowers from paying off one of the loans with a new one. "A statewide database would be created to track who is eligible for payday loans."
All of this seems reasonable. However, the governor disagreed. He said "it is this administration's abiding belief that government's role is not to protect people from their own actions." (Newark Advocate). He also said "he recession leaves consumers needing the ability to get access to cash to avoid eviction, foreclosure, bankruptcy and having their lights turned off."
The bill had an unexpected advocate - Advance America. Now you may be surprised that a payday lending company would support the bill. They said the bill "would have provided consumers who choose to use the cash advance product in South Carolina with comprehensive reforms and protections." (Charleston Regional Business Journal) Advance America realizes that if the bill had succeeded, it would have been free to continue to compete, while smaller companies may have had trouble with the new legislation.
Remember, 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.
Thursday, May 22, 2008
Any Day Pay Day, How about today - part 3 (Final)
Over most of this week, I've been posting on payday loans. Part 1 dealt with the definition and the reason these businesses exist. It looked at some of the details from the business point of view. Part 2 dealt with two states' plans to eliminate these loans. Today, I'll voice my opinion.
I have to say I learned a lot from this research and I generated some new readers. I also got the attention of some of my "old" readers, so hopefully this last post will get some attention too.
I have to start by pointing out (in case you didn't know) that I'm a conservative, who believes in the free market, capitalism, motherhood and apple pie (with ice cream preferably). The idea of restricting business (actually eliminating it) goes against my grain. Companies should be free to run their business in the way they see fit and these companies are not that profitable (9% according to a little math based on this MSN Money article.
These companies obviously fulfill a need and they actually are less expensive than bouncing a check. For example, someone close to me used his Debit Card for $5 of gas (a small spray). Since he only had about $1 in the account, the bank charged him an extra $35. That's expensive gas.
I also believe in self discipline and each person being responsible for his/her-self. If you want to do something stupid, that's fine with me. I'd really like not to hear about it, but you're welcome to shoot yourself in the foot if that's what you want. After all, Barney Fife can't be the only one with a hole in his shoe.
But even with that understanding, I can't help but believe that we'd all be better off if these businesses closed down. Christian Science Monitor says that smacks of paternalism and I agree. But as a father, I think that paternalism is required sometimes. Just like we outlaw crack cocaine, we should outlaw payday loans and their first-cousin title loans.
This will cause job loss. The folks who work in these places aren't all guilty. They just applied for and got a job (which is a good thing) as a clerk. It's not them that's loaning the money out, it's the company. And they will be punished by losing their job. But so too does the crack dealer lose his job when he goes to jail. His family suffers from his loss of income and unfortunately, the payday lending clerk's family will suffer too.
Consumer credit counseling needs to improve. The best defense is a good offense, consumers need to put money aside so they become their own payday lender in an emergency. One of my readers is involved with Junior Achievements, teaching "kids money basics and how short-sighted and addictive this bad credit behavior is." He does lots of other good stuff, so check out Neil's blog when you can (see it here).
So there it is, my opinion. Please feel free to comment on this or either of the two previous posts.
I have to say I learned a lot from this research and I generated some new readers. I also got the attention of some of my "old" readers, so hopefully this last post will get some attention too.
I have to start by pointing out (in case you didn't know) that I'm a conservative, who believes in the free market, capitalism, motherhood and apple pie (with ice cream preferably). The idea of restricting business (actually eliminating it) goes against my grain. Companies should be free to run their business in the way they see fit and these companies are not that profitable (9% according to a little math based on this MSN Money article.
These companies obviously fulfill a need and they actually are less expensive than bouncing a check. For example, someone close to me used his Debit Card for $5 of gas (a small spray). Since he only had about $1 in the account, the bank charged him an extra $35. That's expensive gas.
I also believe in self discipline and each person being responsible for his/her-self. If you want to do something stupid, that's fine with me. I'd really like not to hear about it, but you're welcome to shoot yourself in the foot if that's what you want. After all, Barney Fife can't be the only one with a hole in his shoe.
But even with that understanding, I can't help but believe that we'd all be better off if these businesses closed down. Christian Science Monitor says that smacks of paternalism and I agree. But as a father, I think that paternalism is required sometimes. Just like we outlaw crack cocaine, we should outlaw payday loans and their first-cousin title loans.
This will cause job loss. The folks who work in these places aren't all guilty. They just applied for and got a job (which is a good thing) as a clerk. It's not them that's loaning the money out, it's the company. And they will be punished by losing their job. But so too does the crack dealer lose his job when he goes to jail. His family suffers from his loss of income and unfortunately, the payday lending clerk's family will suffer too.
Consumer credit counseling needs to improve. The best defense is a good offense, consumers need to put money aside so they become their own payday lender in an emergency. One of my readers is involved with Junior Achievements, teaching "kids money basics and how short-sighted and addictive this bad credit behavior is." He does lots of other good stuff, so check out Neil's blog when you can (see it here).
So there it is, my opinion. Please feel free to comment on this or either of the two previous posts.
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.
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.
Monday, May 19, 2008
AnyDay Pay Day, how about today? - Part 1
By special request. One of my readers recently asked my opinion on SC legislation winding its way through committee on payday loans. I offered a teaser about this last week and generated some other interest. Then I recalled that another reader's state (Ohio) was also working
on legislation, so I traded a few emails and got even more information. David's blog can be found at this site. I don't always agree with him, but he provides some good information on matters of politics and an alternative view. So with three people interested, I knew it was important.
This is the first in a three-part post on payday lending. I hate doing this as a series, but I honestly think that this is best for all of us. I feel obligated to present the facts about the business along with facts about the legislation. Only after I've presented the facts on both sides, will I present my opinion.
The timing of this is also important. Someone close to me recently got into some tight financial times and took out their first payday loan. They needed money to pay rent and were told that the late fee was $50 per day (I haven't been able to verify this). So, they walked down to
Cash Advance (or a similar store), wrote a post dated check for $345, got $300 in cash and paid the rent. They knew they had money coming in a few days. (I still have to follow-up to confirm they paid it back).
To describe payday loans, the FDIC says they "are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment (such as a social security check). Payday loans are usually priced at a fixed dollar fee, which represents
the finance charge to the borrower. Because these loans have such short terms to maturity, the cost of borrowing, expressed as an annual percentage rate (APR), is very high. Borrowers who obtain payday loans generally have cash flow difficulties, and few, if any, lower-cost borrowing alternatives." (see here)
Payday lending varies by state and not all states allow the practice. Generally, it works like this. You walk into one of these places and write a check (limits are typically about 1/4 of your monthly pay or $500-$600) with a future date on it and you walk out with cash. Fees
vary from state to state, for SC it's typically 15%, in ND (one state I checked at random) it's 20%. This can help you avoid late fees and returned check charges.
Critics are quick to point out that 15% over two weeks turns into 390% over a year. Using almost any definition you can find, that's usury. However, this business has a lot of risk involved. A few years back, I had the privilege of sitting next to a person from Advance America on an outbound flight. He and several co-workers were headed to a convention. We talked a bit about his business and he confided that they rarely cash the checks that people leave behind. Frankly, he told me "those people aren't likely to have money in the bank". According to MSN
Money they recently increased "the provision for doubtful accounts as a percent of total revenues for the quarter ended March 31, 2008 was 12.6%."
Payday lending can be seen as a product with strong demand. "Consumer demand for the traditional payday loan product remains strong." (MSN Money) In other words, people want (or need) payday loans.
With over 12% expected loss rate, you have to expect these companies to charge high rates. In fact, a quick analysis of Advance America's Income Statement in the MSN Money article shows a Net Income of only 9% of first quarter revenue (down from 13% last year). This is not what
I would consider a high rate of return for a business. By contrast, IBM's income was 9% for first quarter and Microsoft was a whopping 30%. 9% for a very high risk business sounds low in this light.
As mentioned earlier, some states don't allow this type business. Many states (SC & Ohio for example) are looking at legislation to restrict them. Regarding the legislation, Christian Science Monitor (which I believe is neither Christian nor Science) has an article titled "Ban
payday loans? Big mistake." It says that the idea smacks of "paternalism – the idea
that government must take care of adults because they aren't able to do so themselves." It goes on to say that this "is the ideology behind the wave of politicians determined to limit how much and how often Americans can borrow money."
Government making decisions for individuals? Something only a progressive could promote. Limiting business? Hardly conservative. Sure, some people are hurt by the practices, but should that exclude other borrowers? And shouldn't the individual be responsible for his/her own
actions (an idea I often promote).
Advance America has advice on their website for borrowers who might be hurting. "We at Advance America recommend that you evaluate the costs and benefits of all alternatives before obtaining an advance." I encourage you to check it out at their website.
My next post will be on what some states are trying to do to payday lending and then my third post will give my opinion. Hopefully, I haven't tipped my hand too much here. Please add comments as you see fit. Also, I have MUCH more reference material I'll gladly share and I'll also be glad to debate this via email or my blog.
on legislation, so I traded a few emails and got even more information. David's blog can be found at this site. I don't always agree with him, but he provides some good information on matters of politics and an alternative view. So with three people interested, I knew it was important.
This is the first in a three-part post on payday lending. I hate doing this as a series, but I honestly think that this is best for all of us. I feel obligated to present the facts about the business along with facts about the legislation. Only after I've presented the facts on both sides, will I present my opinion.
The timing of this is also important. Someone close to me recently got into some tight financial times and took out their first payday loan. They needed money to pay rent and were told that the late fee was $50 per day (I haven't been able to verify this). So, they walked down to
Cash Advance (or a similar store), wrote a post dated check for $345, got $300 in cash and paid the rent. They knew they had money coming in a few days. (I still have to follow-up to confirm they paid it back).
To describe payday loans, the FDIC says they "are small-dollar, short-term, unsecured loans that borrowers promise to repay out of their next paycheck or regular income payment (such as a social security check). Payday loans are usually priced at a fixed dollar fee, which represents
the finance charge to the borrower. Because these loans have such short terms to maturity, the cost of borrowing, expressed as an annual percentage rate (APR), is very high. Borrowers who obtain payday loans generally have cash flow difficulties, and few, if any, lower-cost borrowing alternatives." (see here)
Payday lending varies by state and not all states allow the practice. Generally, it works like this. You walk into one of these places and write a check (limits are typically about 1/4 of your monthly pay or $500-$600) with a future date on it and you walk out with cash. Fees
vary from state to state, for SC it's typically 15%, in ND (one state I checked at random) it's 20%. This can help you avoid late fees and returned check charges.
Critics are quick to point out that 15% over two weeks turns into 390% over a year. Using almost any definition you can find, that's usury. However, this business has a lot of risk involved. A few years back, I had the privilege of sitting next to a person from Advance America on an outbound flight. He and several co-workers were headed to a convention. We talked a bit about his business and he confided that they rarely cash the checks that people leave behind. Frankly, he told me "those people aren't likely to have money in the bank". According to MSN
Money they recently increased "the provision for doubtful accounts as a percent of total revenues for the quarter ended March 31, 2008 was 12.6%."
Payday lending can be seen as a product with strong demand. "Consumer demand for the traditional payday loan product remains strong." (MSN Money) In other words, people want (or need) payday loans.
With over 12% expected loss rate, you have to expect these companies to charge high rates. In fact, a quick analysis of Advance America's Income Statement in the MSN Money article shows a Net Income of only 9% of first quarter revenue (down from 13% last year). This is not what
I would consider a high rate of return for a business. By contrast, IBM's income was 9% for first quarter and Microsoft was a whopping 30%. 9% for a very high risk business sounds low in this light.
As mentioned earlier, some states don't allow this type business. Many states (SC & Ohio for example) are looking at legislation to restrict them. Regarding the legislation, Christian Science Monitor (which I believe is neither Christian nor Science) has an article titled "Ban
payday loans? Big mistake." It says that the idea smacks of "paternalism – the idea
that government must take care of adults because they aren't able to do so themselves." It goes on to say that this "is the ideology behind the wave of politicians determined to limit how much and how often Americans can borrow money."
Government making decisions for individuals? Something only a progressive could promote. Limiting business? Hardly conservative. Sure, some people are hurt by the practices, but should that exclude other borrowers? And shouldn't the individual be responsible for his/her own
actions (an idea I often promote).
Advance America has advice on their website for borrowers who might be hurting. "We at Advance America recommend that you evaluate the costs and benefits of all alternatives before obtaining an advance." I encourage you to check it out at their website.
My next post will be on what some states are trying to do to payday lending and then my third post will give my opinion. Hopefully, I haven't tipped my hand too much here. Please add comments as you see fit. Also, I have MUCH more reference material I'll gladly share and I'll also be glad to debate this via email or my blog.
Subscribe to:
Posts (Atom)