If my line had been a more representative cross-section of payday borrowers, seven or eight of the 10 would have annual incomes higher than $25,000, and two would earn more than $50,000. There would be four homeowners and six people with major credit cards in their wallets. Half would have attended some college, and nearly everyone would have a high school diploma. All these statistics come from the Community Financial Services Association of America, an industry group, but the industry’s left-wing critics at the Center for American Progress have produced strikingly similar numbers.
In that statistically representative line, you’d be unlikely to encounter more than one person over 55 years old. Six would have children at home; a narrow majority of the ones with kids would be married. And all would have jobs and bank accounts, since you can’t get a payday loan without at least one of each.
The payday lending industry was essentially created from scratch over the past two decades. Back in the early 1990s, supermarkets and dedicated check-cashing outfits would convert pay stubs into dollar bills, and the odd mom-and-pop shop might make a loan to a trusted customer against an upcoming paycheck. As banks went digital and checks became more reliable, check-cashing firms such as Advance America, ACE Cash Express, and Check ’n Go found payday lending to be a logical extension of their business. Today there are more than 20,000 payday lending outlets, more than all the Starbucks and McDonald’s stores in the country combined. Estimates from the industry’s opponents and supporters alike put the number of U.S. customers between 15 million and 20 million annually.
I made my visit to the payday lender on the 15th of the month, so most people in line were there to repay loans, not get new ones. According to the Community Financial Services Association of America, whose numbers are similar to those of state regulators, 90 percent of loans from payday lenders are repaid by the due date. This figure compares favorably to, say, the current repayment rates for subprime adjustable rate mortgages.
Critics tend to focus on the minority who can’t or don’t pay back their loans on time. Kathleen Day, a spokesperson for the Center for Responsible Lending, says: “The model that the payday industry is based on is repeat borrowers. If no one in the payday industry rolled over a loan, they would not be making money. It’s true that most of the customers don’t roll over, but those who do pay the profit.”
That sounds plausible. Everyone knows people who are bad with money, and it’s easy to see how someone with cash flow problems could wind up getting suckered into re-upping over and over, taking out a new, slightly larger loan immediately after repaying the first one, eventually paying more than the principal in interest. But those aren’t the people that lenders actually rely on to stay in business, according to a 2005 study from the Federal Deposit Insurance Corporation’s Center for Financial Research.
“We do not find that loan renewals or loans from frequent borrowers are more profitable than other loans per se, although they certainly contribute to a store’s loan volume,” concludes the study, which was prepared by economists Mark Flannery of the University of Florida and Katherine Samolyk of the federal Division of Research and Statistics. Flannery and Samolyk also found that lender profitability did not increase in stores located in poorer neighborhoods—the places where you’d expect more return customers and rollovers.
The Uses of Usury
As horrifying as 400 percent annual interest sounds, it doesn’t reflect the experience of the typical borrower. No one keeps a payday loan for a year; that’s not how these things function. Payday lenders charge about $15 per $100 on a seven- or 14-day loan, plus another $20 or so in fees. They check your paperwork and then give you $100 in cash. You leave a post-dated personal check as insurance and promise to come back in two weeks with $135. If you show up empty-handed, or not at all, they cash your check. If the check bounces, the firm sends debt collectors after you—not the knee-breaking kind, but the same guys who interrupt your dinner when you miss a couple of credit card payments. If you miss your deadline to repay, the lender refuses to deal with you again. Nine out of 10 customers pay on time.
If the level of hostility against payday lending is disproportionate to the percentage of payday defaults, that may be partly due to cultural traditions. For much of human history, stretching at least as far back as biblical prohibitions against the practice, lending money at interest, otherwise known as usury, has been considered extremely bad form.
Trawl through online arguments against payday lending, and you're likely to come across something like this, from Americans for Fairness in Lending: "Prophet Ezekiel includes usury in a list of 'abominable things,' along with rape, murder, robbery and idolatry." The site also notes that in his Inferno, Dante "places usurers at the lowest ledge in the seventh circle of hell—lower than murderers." In Hamlet, Polonius famously advises: "Neither a borrower nor a lender be;/For loan oft loses both itself and friend/ And borrowing dulls the edge of husbandry." Charges of usury periodically inflamed pogroms against Jews in Europe. (Jewish law forbids charging interest to other members of the tribe but not to gentiles, which is the historical reason moneylending is associated with Jews.) Koranic instructions against interest are enforced in the Islamic world even today.
The traditional view of usury as morally corrupt changed only during the Enlightenment. As a young man in 1787, the philosopher Jeremy Bentham wrote a controversial defense of usury in which he attacked the aging Adam Smith for supporting legal limits on the rate of interest, noting that to restrict people’s choices was to reduce the overall welfare. The British author G.K. Chesterton has pointed to Bentham’s essay as the moment when “the modern world began.” Capitalism isn’t possible without capital, and accumulating capital in a world without interest-bearing loans is almost impossible. Hatred and fear of usury still lingers in the industrialized world in the attenuated form of vague moral outrage at high-interest loans.
Payday lending is currently regulated in 37 states, plus the District of Columbia, and banned in a dozen more. Many of the laws include references to this ancient sin. “Most states have usury laws,” says Day, the spokesperson for the Center for Responsible Lending. “This is a very old Judeo-Christian idea, that it’s a bad thing to bury people in debt.” But the contemporary definition of usury has always been fluid. Sometimes charging any interest at all is enough to qualify. Other times it’s more a matter of what’s perceived as a fair deal. These days, 36 percent is the typical maximum legally allowed interest rate for states where loans are regulated, but there are and always have been multiple exceptions, especially when politicians want to get things done.
Extinction by Regulation
My first attempt at a payday loan came at ACE Cash Express in the gentrified Adams Morgan neighborhood of Washington, D.C. Since it was in the middle of a cold snap, I was grateful I didn’t have to travel far for my cash. But when I got inside, the elderly woman behind the counter told me the shop no longer offered payday loans, and as far as she knew, neither did anyone else in the city. “Not since they banned them here,” she explained, with the air of someone who has answered the same question many times.
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Bertha Lewis|9.25.09 @ 3:18PM|#
Instead of demonizing payday lenders, why not go after the major banks that own them?
Bertha Lewis|9.25.09 @ 3:22PM|#
(I'm not directing the above question to Katherine Mangu-Ward, but rather the people who want to take out payday lenders)
|9.25.09 @ 3:24PM|#
Apparently the U.S. needs something like the Grameen Bank to bypass these village money lenders by making payday loans with below-market interest rates.
|9.25.09 @ 3:28PM|#
The Grameen Bank does not lend with below-market interest rates. It has NEVER done that - they simply make debtors snitch on each other to make sure everybody pays.
New World Dan|9.25.09 @ 3:36PM|#
How 'bout we just teach the poor to, you know, budget and not pay 20% interest plus fees. If we could do that, we wouldn't have so many poor people.
I, Kahn O\'Clast|9.25.09 @ 3:37PM|#
People who use payday lenders are too committed to their xbox. wii, flatscreen, bling, whathaveyou to go the traditional rout for people who need quick cash: The pawn shop.
I am in favor of a free market, but payday lending is just another reason it is more expensive to be poor than middle class: transaction costs eat up huge amounts of wealth.
Barney Rubble|9.25.09 @ 4:00PM|#
Choice is good, except when our overlords deems we are making bad ones.
John Tagliaferro|9.25.09 @ 4:06PM|#
(I'm not directing the above question to Katherine Mangu-Ward, but rather the people who want to take out payday lenders)
As long as she splits the check I will take her anyplace.
AssWipe|9.25.09 @ 4:07PM|#
"I am in favor of a free market, but payday lending is just another reason it is more expensive to be poor than middle class: transaction costs eat up huge amounts of wealth."
Not as much as lottery tickets. There is a reason the poor don't have money and it isn't due to capitalism or free markets.
AssWipe|9.25.09 @ 4:08PM|#
And a t $5.00 a pack, why do the poor smoke? Most of the "homeless" do too.
AssWipe|9.25.09 @ 4:08PM|#
You can fill your belly on $5.00/day.
Xeones|9.25.09 @ 4:16PM|#
And a t $5.00 a pack, why do the poor smoke?
'Cause the evil tobacco companies force them to by filling their products with all that smooth, delicious nicotine. Duh. Tow the lion, dude.
It's racist and/or fascist to say that people should be responsible for their own choices in life, after all.
|9.25.09 @ 4:21PM|#
Homeless people suck at geography. There are an awful lot of them suffering through northern winters. With all that free time, you'd think they'd start walking south.
Tony|9.25.09 @ 4:23PM|#
If you're addicted to something, is it really a choice?
|9.25.09 @ 4:32PM|#
There are alternatives to payday loan places so the poor people that you refer to have options, THEY CHOOSE not to go elsewhere because they don't want to be bothered with financial literacy courses or other "hassles". The "government" put a 36% cap on the interest rates that payday loan shops can charge consumers, so the payday loan shops choose to stop making payday loans, so it's the government's fault? Please, these PREDATORY lenders are in it to make money not help people, otherwise they would continue to offer the loans at a reasonable rate. I say let the people go where they will, but don't complain when you're deeper in debt because of your poor choices.
ghost crabs|9.25.09 @ 4:37PM|#
"If you're addicted to something, is it really a choice?"
There are many addiction clinics that cater to the poor.
|9.25.09 @ 4:45PM|#
yes Tony, it's still a choice...
Jordan|9.25.09 @ 4:54PM|#
Nobody is born addicted to nicotine.
|9.25.09 @ 4:59PM|#
You know what's the best idea by far? Don't by things you can't afford! It's so simple! You see that Hummer? Back away from it! If everyone had a fucking brain, no one would be in debt!
|9.25.09 @ 5:25PM|#
If you're addicted to something, is it really a choice?
Yes - a person can be addicted to sex, but that does not mean he o she will invariably rape a person. And people HAVE stopped using drugs on their own, as statistics have shown (mentioned many times in Reason.)
|9.25.09 @ 5:44PM|#
Just once I'd like to see one of the compassionate politicians supporting the clampdown on rates visit their local payday loan outlet, explain to the hard-working people waiting in line how they're too stupid to make their own decisions and that they need to be protected from themselves, then wait to be thanked for their kind gesture. We can videotape the awkward exchange at post it on You Tube, Lonewacko style!
|9.25.09 @ 6:24PM|#
I kind of view payday loans and lotteries as special taxes on people who are poor at mathematics. Give government a share of the profits on payday loans just as it profits from lotteries, and government will quickly find some other injustice to pick on.
|9.25.09 @ 6:50PM|#
Excellent article, but note that at most payday loan stores across the country a $100 loan costs $15 or $20, not $15 plus a $20 fee, so the total payback is $115 or $120, not $135.
In my opinion usury laws are an authoritarian tradition which should have been abolished along with the tradition of slavery. They are a gross violation of freedom of commerce, or the right of citizens to engage in honest, mutually agreeable economic transactions (where no dangerous goods are involved).
The fact is that you cannot draw a line between a "reasonable" and "excessive" rate of interest on a loan. Small-dollar short-term loans, which can be extremely useful for many people and life-saving for some, must carry a high APR because the lender only receives interest on a small amount of money for a short period of time, and needs to recover costs.
If the free market should work anywhere it is in the field of small loans, because so many people can enter the business with so little expertise or expensive equipment or even capital, if you have good credit, as you can borrow the money which you will lend. Yes, there needs to be strong disclosure requirements and enforcement of debt collection laws, but beyond that the cost of loans is appropriately set by the dynamics of supply and demand.
Consumer protection is supposed to be about curbing dishonesty and harrassment, not telling merchants and service providers how much they can charge.
And if lenders are "responsible" for ensuring that borrowers can afford their loans, then why shouldn't other merchants and service providers be similarly responsible? Before long you won't be able to buy anything without the seller being required to investigate your finances to determine if you are making a wise decision, in the view of the state. This is simply 1984 big brotherism.
People should think twice before jumping on the bandwagon of the current Salem-witch-hunt-like crusade against payday lending.
|2.15.10 @ 6:16PM|#
excellent comment...rational and well thought out.
MNG|9.25.09 @ 7:28PM|#
I'm against restrictions on payday lending, it's bad paternalism. The poor find these things useful, we should respect their choices. Liberalism should be about expanding choices for most, not shutting them down.
|9.26.09 @ 12:00AM|#
This is rather non-sequitur, but was it not the fact that Christians prohibited Jews from most professions, rather than Jewish views on usury, that resulted in the concentration of Jews in moneylending?
|9.26.09 @ 3:37AM|#
The "government" put a 36% cap on the interest rates that payday loan shops can charge consumers, so the payday loan shops choose to stop making payday loans, so it's the government's fault?
Yes, it is the government's fault. If you think 36% interest on unsecured, no qualifying loans is a profitable endeavor, why don't you go into the payday loan business yourself?
Here's the math: lend $1000 with a 10% default rate. At 36% interest, that's a gross return of $1224.00. But don't forget costs; that's an average of $12/$100 according to the article. That would be $120 in costs, netting you $1104. Congratulations, a 10.4% return. Not much better than the stock market, and hardly worth the business risk considering you'd get more in CDs at a 14% default rate and start losing money at ~17% default rate.
robc|9.26.09 @ 8:34AM|#
If you're addicted to something, is it really a choice?
There are those who think that life
Has nothing left to chance
With a host of holy horrors
To direct our aimless dance
|9.26.09 @ 12:10PM|#
Bob Smith, you are talking about lending $1000 at 36% interest over a period of a year, with a default rate of 10%. That is something of a profitable venture, but it does not apply to payday lenders because they lend to people who do not have good credit and cannot borrow from any other source, by and large, other than overdrafting their bank account or bouncing checks. That is why the lenders make short-term loans to these people, using post-dated checks as collateral, because to make long-term loans to them would result in default rates way higher than 10%. A 36% rate cap would abolish short-term lending and make all loans, other than ones based on charity, unavailable to payday loan customers.
|9.27.09 @ 9:49AM|#
The truth of the matter is that if you can afford to pay the interest you can afford to not borrow it. People need to stop spending money they don't have. You claim it is to pay the electric bill or phone bill but the truth is they spent that money to go out to dinner or a movie or the bar. now they need to borrow money to pay the bills.
Steve in Clearwater|9.27.09 @ 1:58PM|#
As a two-income, essentially stable couple, we've used payday loans here about six times a year for past few years.
In Florida, it's 10% for two weeks and thus we've paid around $400 in fees to help assure we avoid late fees with utilities, landlord or car payments.
One note however - In Florida, if your collateral check to the lendor bounces, you are not just looking at "collection agencies". You're facing potential criminal charges for passing bad check(s). I'm betting it's that way in most states, which at the end of the day is what helps assure that 90% of loans are repaid on time.
zoltan|9.27.09 @ 4:41PM|#
With all that free time, you'd think they'd start walking south.
Nooooooooooooo, we have enough here in Austin already. The difference is, there are probably way more homeless shelters in the North than South, and no one wants to deal with these summers without air conditioning.
|9.28.09 @ 10:34AM|#
Regulation limiting choice makes things worse. If is slightly off topic but here is an example. The Feds are limiting overdrat fees so now banks are going to start returnign the checks and charging NSF fees. So instead of being overdrawn and having one $30 fee your check will be retunred and you will have two thirty dollar fees and the embarrasment of having to go back and pay the fee where you wrote the check. Sound sliek a good deal to me.
maz|9.28.09 @ 3:44PM|#
Many credit card companies charge a fee of $59 for late payments. It would be cheaper to pay the high personal loan fee many times, than that of a late payment, if you had extenuating Circumstances one month. These loans can be dangerous and people can fall into traps; However, that falls under personal responsibility. Many of the large banks that own credit card companies, do not like these loans, because it cuts into their profit margins. They would just rather their friends in Washington Wright bills to help eliminate there competition.
|9.28.09 @ 5:31PM|#
Actually, I'm not totally against limits.
A a lender can't make money at 36%, maybe they shouldn't be in business. Just like if a investment house can't make money at say 10x leverage or so (instead of 30-50x like they were), then maybe they shouldn't be trying to do what they do.
I guess what I'm saying, is poor people, and bankers are both to stupid to manage money properly, lol
LarryA|9.28.09 @ 6:35PM|#
Please, these PREDATORY lenders are in it to make money not help people, otherwise they would continue to offer the loans at a reasonable rate.
RTFA. All the lenders that offer what the government (and you) consider "reasonable rates" have to be subsidized to break even.
There are dozens of payday lenders, and they compete for business. If any of them was making a big profit, the next shop down the street would undercut them.
I guess what I'm saying, is poor people, and bankers are both to stupid to manage money properly, lol
If you compare the money-management track record of poor people and bank managers to that of the U.S. Congress, the poor come off looking good.
"You have to attend a financial literacy class," says Schein
Haven't had to do that yet, but I have recent experience with required government employment classes. The quality of information and instruction is truly amazing. Not in a good way.
What consumers really need is protection from government.
Pingback| 10.1.09 @ 10:59AM
Reason Magazine : Payday of Reckoning | Daily News Headlines links to this page. Here’s an excerpt:
|10.5.09 @ 9:35AM|#
Consumers facing a necessary expense and caught short between paydays must often choose between costly and undesirable options: pay the bill now and face bounced check or overdraft protection fees; pay the bill late and incur late penalties; borrow from friends and family; or take out a loan from an unknown Internet lender.
Removing one option in today's environment will only force consumers into more expensive, less desirable and unregulated alternatives. Payday advances are two week, not annual loans. For each $100 advanced, customers pay a typical fee of $15-$17. Because payday loans are two-week loans they cannot be offered at the same annual rates as annual credit products such as credit cards, auto loans and home mortgages. The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen.
Pingback| 10.10.09 @ 4:34PM
Big Government » Blog Archive » Consumer Financial Protection Agency: Big Brother Pro links to this page. Here’s an excerpt:
Pingback| 11.30.09 @ 11:55AM
¤ Fast Cash Advances & Payday Loan Offers – 30-Day Payday Loan ¤ links to this page. Here’s an excerpt:
Pingback| 1.1.10 @ 3:53PM
Paid Out: Washington State Makes Life Harder For The Poor - Ethan Epstein - epstein' links to this page. Here’s an excerpt:
Pingback| 1.3.10 @ 5:48PM
Making life harder on the working poor links to this page. Here’s an excerpt:
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