Payday Lending

Payday Lending: Why Isn't Everyone Doing It?

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Matt Zwolinski at Bleeding Heart Libertarians raises, and answers, some interesting questions about those who feel/fear that payday lending is not a service to people who need it and want to pay for it, but essentially hyperprofitable exploitation of them:

If payday lending is so profitable, why isn't everybody doing it? This is a good question to ask yourself anytime you hear a story about some company earning unusually high profits off the back of a vulnerable population. If investors could earn a 200% rate of return by investing in new payday lending operations, why are smart investors wasting their time and money with anything else? Perhaps there's something more to the picture that we're not seeing?

Payday lending is not that profitable. Well, we don't have to guess. People have studied this. And according to one study, the average profit earned by payday lenders was just 7.63%. By way of comparison, the same study reports that the average Starbucks franchise earns about 9% profit. So, if that 400% APR isn't translating into sky-high profits for payday lenders, where exactly is it going?

Payday loans are short term loans. An Uber ride from downtown San Diego to La Jolla costs about $25. I think that's a pretty reasonable price. But suppose I told you that the rate Uber charges to drive you 12.5 miles in San Diego would translate into a $6,000 trip from San Diego to Boston! Outrageous! Exploitative! Except, nobody uses Uber that way. And almost nobody uses payday lenders to take out loans that are appropriately characterized by an annual percentage rate. Payday loans are short term loans….

So payday lenders aren't earning as much as we think. But they're also spending a lot more than we think. Payday lenders, unlike banks, keep long hours. That costs money. They also have a relatively high store density. That costs money, too. Finally, think about this. Payday lenders are lending to people who have a hard time getting credit elsewhere. Why do they have a hard time getting credit elsewhere? Because they have very bad credit. What does that mean for payday lenders? It means that sizeable portion of the loans they extend are going to default. And that costs money.

Taking away or limiting an option that other people have and choose to use because you wouldn't do the same is not, in and of itself, helping them.

Reason on payday lending.

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  1. OT:The fact that noone has been indicted for any of this is insane to me.

    An email obtained by Congress shows the top official for Healthcare.gov at the Centers for Medicare and Medicaid Services under the Department of Health and Human Services, Marilyn Tavenner, instructed the agency’s top spokesman to “Please delete this email.”The instruction appears significant for several reasons: First, the email to be deleted included an exchange between key White House officials and CMS officials. Second, the email was dated October 5, 2013, five days into the disastrous launch of HealthCare.gov. Third, federal law requires federal officials to retain copies of ?not delete? email exchanges. And fourth, the document to be deleted is covered under Congressional subpoena as well as longstanding Freedom of Information requests made by members of the media.

    1. Exchange has a feature that allows you to compile all email to/from a system be collected in a single mailbox (journaling).

      It sounds like federal law mandates that…

      1. Which makes the request all the more idiotic.

  2. 1. This is first piece from BHL that Ive read that reads normal, without having sebtences that just make no sense.

    2. I still think payday lenders are scum.

    1. without having sebtences that just make no sense.

      Do tell.

    2. Yea I put them in the same boat as the lump sum for annuities people. Don’t get me wrong it should all be legal, but at the same time it’s disgusting how some of these people take advantage of people who are in desperate need.

      1. Also, reverse mortgages.

        And hell, while we are at it, while not as bad, whole/universal life.

        1. And US Savings Bonds.

        2. None of them are as bad as Social Security. At least I’ve never had a gun pointed at my head to force me to get a reverse mortgage.

          1. Well yeah, my list is far from complete.

      2. take advantage of people who are in desperate need

        You mean by providing a service that they otherwise couldn’t get…? How awful!

        1. Sometimes its better to do without.

          Like Idle said, “it should be legal”, but so should selling crack.

          That doesnt mean drug dealers arent scum.

          1. Well, it’s a more complicated than that. Banks don’t loan money to people with low incomes and shitty credit. So if we don’t have subprime and payday lenders, then what we’re really saying is no credit for people who may desperately need it. No legal credit, anyway–there’s always the loan shark.

            1. Does anyone need credit?

              1. There are plenty of people who find themselves unable to cover rent or electricity or groceries or some unexpected but urgent expense at some point in their life. Sometimes it’s just because they’re irresponsible, but sometimes it’s not.

                1. As someone who has been in that situation (not payday loan level, I had access to slightly less bad debt), its pretty damn rare when its not due to irresponsibility. It was in my case, and I bet it is in most peoples cases.

                  Debt isnt always a bad thing, but it is never a good thing.

                  And, yes, I bet we can find cases where people used payday loans responsibly and even meets my “high” standards.

                  That said, you wont find me supporting regulations on it, but I still think they are exploitive scum.

                  1. … its pretty damn rare when its not due to irresponsibility.

                    Is this really relevant, though? Sure, I’ll guess that, in most cases, the situation was caused by bad decisions on the part of the person borrowing. Yes, they should have made better decisions previously. But, they didn’t. At the point they’re taking the loan, the choices they made previously can’t be altered. And, at that point, they have to choose between taking the loan and not. And, for some of the borrowers, it’s a choice between eviction or having thier lights turned off and paying a high rate of interest on a loan. It’s hard to see where they’re not better off with the latter choice.

              2. Needs got nothing to do with it.

                1. Needs got nothing to do with it.

                  Exactly.

                  People keep talking about poor people needing payday loans. They dont.

                  1. At the time they take the loan, they probably do. Yes, they would’t need it if they’d made better decisions. But, once they’ve made bad decisions, the payday loan provides a means to fulfill a real need.

                  2. A $500 loan for 2 weeks will probably set you back around $100. Your $500 rent being late will cost $25 per day, or $350 in 2 weeks. Yeah, nobody needs to save $250.

              3. Does anyone need credit?

                Holy fuck, rob! You are joking here, right?

                To be clear, I am not claiming anyone “needs” credit. I think you must be drunk to be claiming that you know what others need.

              4. Depends on what you mean by “need”. There is very little that one actually needs.

              5. Actually, yes. A lot of the apprentices I deal with only take home $250 to $300 a week. It is pretty hard to have much of a savings account on that kind of money. We do loans in small amounts because of who are clientele are but if we didn’t some of our members would have no choice but use a payday lender. I’ve found that our members come here to the credit union for true emergencies (a wisdom tooth needs to be cut out) and go to payday lenders when they’ve mismanaged their money and are too embarrassed to come here. But most banks, and many credit unions, won’t do a loan under two or three thousand dollars. A low income borrower wouldn’t qualify at a bank for a two thousand dollar loan so they can be screwed in a real emergency.

                1. our not are. Type, read, submit. I can never get that order right.

            2. Yeah, I don’t really get the hate. It’s not as if people don’t get screwed over by mortages, credit cards, etc as well, but most people don’t view those as evil.

              1. See my list above, I put US Savings Bonds on the evil list.

                And I will add credit card companies to it.

                1. This is just clownish, robc.

                  1. What, thinking that people who exploit others to use non-optimal financial services are scum is clownish?

                    1. Yeah, that’s not stealing the argument or anything.

                      Define “exploit” and “non-optimal.”

                      And now tell me how credit cards do any such thing. Or mortgages, even.

                    2. I will use whole life as an example.

                      While there are some exceptions, for the vast majority of people, term life + a mutual fund is a much, much better idea than a whole life policy.

                      At the same amount per month, the term+mutual fund will provide the same amount of insurance and a much better investment.

                      If this is the case, why do (some) insurance brokers push whole life? Because they get a larger commission than for term.

                      And then there is Gerber.

                    3. Yes, you are being clownish. This is like saying that kids who make $1.00 a day toiling away in garment factories are being exploited by the factory owner when their other choices are subsistence farming, child prostitution or starvation.

                    4. Gotta agree that it’s clownish. You don’t see payday lenders asking for bailouts.

                      Call them scum if you wish, but there are degrees of scum, and I’d call the too big to fail banks scummier.

                      The US Treasury does lots of scummy stuff, and US Savings bonds go into the “insignificant” category.

                    5. Call them scum if you wish, but there are degrees of scum, and I’d call the too big to fail banks scummier.

                      I have no disagreement there.

                    6. rob, they are providing a service to people who have no other options, and taking big risks in doing so. I really think you are dead wrong about your opinion.

                    7. to people who have no other options

                      Bullshit.

                      Do without until payday is always an option.

                      Budget properly is an option.

                      People have options.

                    8. They still have those options, plus one more.

                      There’s a more complicated argument about motivations to be made (would a drunk buy that last case of beer if his children were hungry and he knew that there was no such thing as payday loans?), but functionally this is just another voluntary contract that people can sign for good or ill.

                    9. Do without until payday is always an option.

                      It ain’t when it’s the rent, the heat, the fucking parking ticket, etc.

                    10. Do without until payday is always an option.

                      Rent? Electric? Lots of luck with that.

                      Budget properly is an option.

                      Really? I guess you’ll rent them your time machine (at a non-exploitive price) to go back in time and reverse their prior decisions, right?

                    11. “What, thinking that people who exploit others to use non-optimal financial services are scum is clownish?”

                      You know what, yes even when you frame it like that it’s clownish.

                      Imagine how stupid it sounds when laid out accurately.

                    12. It would take some pretty remarkable circumstances for me to borrow money on these kinds of terms, but there are loads of people who live on a paycheck-to-paycheck basis and need money in advance of the next paycheck. Like I said, it’s either they pay a premium for their credit riskiness, or they don’t get credit at all.

                      There’s a huge temptation by many people to treat people who make these kinds of poor financial decisions (more to get to these straits than in using payday loans) as children, needing the guiding hand of those of us who are smarter to protect them from expensive lenders. Some even suggest requiring the payday lender to be a kind of fiduciary for the borrower, which is all kinds of crazy.

                    13. I think there is some middle ground between what you are saying and just saying, “whatever, business is business.”

                      I dont have a problem with it being legal but disreputable.

                    14. Like anything, there’s a range from legitimate to less legitimate to criminal. In subprime lending, rates have been all over the place, with some just as high as the law allows and others set by a risk-based pricing model, which takes into account income, credit score, etc.

                      My point is that pricing for risk is entirely legitimate. Even payday lenders expect to be repaid, so it’s not like they’re trying to destroy their borrowers. Where it gets dicey is when people are constantly refinancing loans at higher rates to pay off earlier debts, but that’s more common in secured loans, I suppose.

                    15. Im distinguishing between legal and ethical and moral.

                      I think payday loans should be legal. The market keeps them ethical (they might be anyway), they are charging what the market and risk bears, their RoR shows that. Its moral that I have a problem with.

                    16. Yeah, what the heck, why did Jesus provide all those bread and fishes? All those irresponsible dumb asses shouldn’t come all out there in the wilderness without packing adequate food supplies.

                    17. And on what ground is it immoral?

                      If someone came to me and said “Bill, I really screwed up. I need your help. And, in helping me out, you’re going to have to take a big risk.”, I don’t think it would be at all immoral for me to want to be compensated enough so that, on average, I’m made whole in helping them out.

              2. I suspect that much of it has to do with the fact that every payday loan storefront I’ve ever seen is in a bad neighborhood. If every bank were in a strip mall surrounded by cut-rate liquor stores, we might have the same associations about them.

                A lot of liberal economic reasoning depends on cutting through our atavistic, humane reactions to things that we just know are exploitative (payday loans, sub-minimum wages, and price gouging being big ones) to understand that these institutions are adaptive.

                1. every payday loan storefront I’ve ever seen is in a bad neighborhood

                  Yes, and the hate expressed above smacks a little too much of contempt towards one’s lessers to me.

                  And don’t get me started with “drug dealers are scum”.

                  1. When I was in banking, there were people who hated banks so much that they’d only do business with finance companies, despite the higher cost.

                    1. I did just that when in 2007 Chase raised my credit card interest rate to 27% because I had high usage on my cards (no missed payments, delinquencies, etc.).

                      I went to American General Financial and took out a signature loan at something like 29% simply so Chase wouldn’t be getting it. I rinsed and repeated when BofA raised my 10.9% card to 25.9% and told me that I could have opted out by sending in some insert that came with my statement. I paid &.9 to AGF for that loan.

                  2. Do I need to modify to “many drug dealers are sum?” Im willing to make that modification, I assumed it was clear.

          2. That doesnt mean drug dealers arent scum.

            Surprising, rob. Why are they scum? Because people are weak and they will submit to their animal urges? As long as they don’t hurt anyone else doing it, why would it be wrong? “Your body is a temple”?

            I see drug addiction much like obesity. If I really enjoy something that doesn’t hurt anyone but myself, that is my choice, how can it be “wrong”? Wrong for you, OK, but not necessarily for me. Why is it wrong to not want to live like a monk so that you can live ten or twenty extra years…as a monk?

            1. Some people call brewers scum, too, for peddling alcohol to the weak.

              1. Beat me to it. It is pretty much agreed that alcohol is a drug, right?

                1. So rob is a drug dealer. Or an aspiring drug dealer, anyway.

              2. They’re scum because beer is awful.

                (I’m a freak who doesn’t like carbonated beverages.)

              3. Yes, some do.

                Im okay with that.

                1. Some do? Do you deny the terrible things that some people do to themselves with alcohol, even beer?

                  Was Bayer scum for selling George Washington Laudanum? Was GW scum for taking opiates on a regular, even “addicted” basis? Was William Wilberforce scum for the same thing?

                  Rob, I am honestly shocked here. You are certainly welcome to your opinion and I don’t think you support prohibition but why the Puritanism? Booze OK, meth bad? Why?

                  Isn’t the real sin a lack of moderation? People who sell alcohol to the immoderate also sell it to the moderate, just like “drug dealers” and payday lenders.

                  1. Isn’t the real sin a lack of moderation?

                    Yes.

                    And many of the examples you mention involve lack of moderation.

                    The key is do drug dealers intentionally sell to those who they know are past that point? If they say, sorry dude, you should consider rehab, I wont sell to you, then probably not scum.

                    1. & how many bars kick out non-belligerent alcoholics with money to buy?

          3. That doesnt mean drug dealers arent scum.

            That’s an awfully harsh things to say about the guys at the liquor store, Rob.

          4. Generally, pawn shops are a better source of credit than payday lenders, but they also require security. And not everyone has any assets that would qualify. Payday lenders provide a needed service, if they didn’t, they wouldn’t exist.

      3. some of these people take advantage of people who are in desperate need.

        Given their margins, I would say the payday lenders are appropriately pricing the risk of their borrowers.

        How is that taking advantage of them?

        1. The high taxes poor people pay is part of what drives them to borrow.

          I say we direct our ire at the more appropriate scum first.

  3. Taking away or limiting an option that other people have an choose to use because you wouldn’t is not, in and of itself, helping them.

    Paternalism means never having to say sorry for screwing people over by limiting their choices.

    1. the choices should exist but I knew a guy who would buy annuities for lump sum payments. A lot of the people your talking about that fall for these scams don’t understand basic financing, let alone the time value of money, people will literally trade tens of thousands of dollars in future cash flow for thousands of dollars in their hand now.

      1. *thousands hundreds

  4. the rate Uber charges to drive you 12.5 miles in San Diego would translate into a $6,000 trip from San Diego to Boston! Outrageous! Exploitative! Except, nobody uses Uber that way.

    [cancels Uber reservation for trip from Tucson to Miami]

  5. If payday lending is so profitable, why isn’t everybody doing it?

    From what I understand there are more payday loan places than McDonald’s, so “everybody” is doing it.

    Now ask yourself why everyone in this country isn’t starting some sort of business. You’ll find the answers in the pages of this very blog.

    1. Yea, why isn’t everyone doing it you ask? “They also have a relatively high store density.” Oh, okay.

  6. That first point, that if something which generates obscene profits isn’t being taken up by more people, then the profits aren’t as obscene as supposed, applies to so many alarums and scarums. I wish more people would think that way.

    1. if something which generates obscene profits

      Without government interference, this is a myth often applied to “pharmaceutical companies”. Whenever I hear some economic ignoramus use the term obscene profits I always say “if that is the case we should invest the Social Security Trust fund into that and all become rich”.

  7. f investors could earn a 200% rate of return by investing in new payday lending operations, why are smart investors wasting their time and money with anything else? Perhaps there’s something more to the picture that we’re not seeing?

    Because there’s only so much money you can squeeze out of poor people?

    1. Or they actually can’t earn a 200% rate of return, as the article pointed out…

      1. 200% APR on chump change is still chump change

        1. 200% apr on chump change * 1000000 chumps isnt.

          1. Apparently so, since there are 10000 competing payday loan places and according to the article “Payday lending is not that profitable.”

            1. It makes a nice return. Nothing special, but if you can own enough stores, it can add up.

              1. But apparently not as well as owning a bunch of Starbucks.

              2. Add in the cost of putting money to lend out in each of those stores.

          2. You’re ignoring the cost of covering 15,000 who quit their job and walk off with your money.

  8. Reading nothing, default rates are sky high, collections are a bitch, and there’s intense regulatory pressure to give the money away.

  9. Taking away or limiting an option that other people have and choose to use because you wouldn’t do the same is not, in and of itself, helping them.

    Right-thinking people understand that freedom, when correctly understood, means the freedom to do what they think you should do.

  10. Wish I had time to hunt down Slactivist’s holier than thou screeds against payday loans. He knows best.

  11. Going by my FB feed, my lefty friends are OK with payday lending interest rates as long as it’s called “Kiva.”

  12. The payday loan critics are stupid to sensationalize with 500% APR because it hurts their credibility. IMO, the evil in the payday loan thing is how they try to keep people on the hook, like a heroin dealer. Now, it’s ultimately the responsibility of the borrower for getting himself into that situation, but it seems pretty fraudulent to me on the part of the lender to try to steer the borrower into the kinds of loans that more often lead to a cycle of debt.

    1. There’s no fraud involved. You know what you have to pay back.

      1. Ok, maybe fraudulent wasn’t the right word. Just shady.

        1. You could perhaps call it unethical.

    2. I think people who are using payday lenders are well past being in financial trouble. Many have declared bankruptcy and have defaulted on past loans, too.

      The real problem is that it sucks to be poor and/or to have borrowed too much money in the past. I spend a lot of time trying to convince my oldest not to borrow a ton of money for school.

      1. Hopefully he listens, because borrowing a lot of money for school, unless he’s seriously on a solid path to become some kind of specialist surgeon, is a mug’s game. And with the ACA, it’s potential impending failure and “Do it again, only harder” reimplementation, I don’t know if even that’s going to be a good bet.

        1. At least he’s studying engineering, but I still think he should borrow as little as possible.

          1. I’d tell him to max the subsidized loans and put them into a CD, then collect a nice little profit.

            1. Ally is selling 3 year CDs with 1.2% APR. In the meantime, your student loan will be accruing interest even faster.

          2. Tell him to get a job.

            Interestingly, students who work about 15 hrs per week have better grades than students who dont work in college.

            1. He has a job, but that’s another issue.

    3. they try to keep people on the hook, like a heroin dealer

      WTF. If a person is hooked on heroin, it’s their fault – not the dealer. Same way I may be hooked on cigarettes but I don’t run around blaming Big Tobacco.

  13. The closest thing I’ve used to payday lending is the checking account advance program that US Bank had until it was discontinued because of their reaction to the new FDIC standards. I was under the impression that it was a lifesaver the one time I used it after losing my job, but thanks to our benevolent overlords I will now be protected from exploitation in case I ever think I need it again.

  14. Why is this news to anyone? I’ve recognized the distinction since my late teens when I worked for a bank that had undertaken a legislative campaign against payday lenders operating in the state. My job included promoting the short-term loans the board had rolled out hoping to compete with payday lenders, a so-called “payday savings” product that aped their loan in every sense except for certain strings attached that, if followed, would eventually reward the borrower with a payout of some percentage of the fees (but not the interest) accrued over the lifetime of the loan. The idea was to “break the cycle” of habitual payday borrowers by locking them into the bank’s product. It was a colossal failure.

    Even as a kid out of high school I realized how disingenuous it was to annualized the interest rate of a two-week loan, and how scummy it was to profess from on high the moral turpitude of payday lending while selling a thinly disguised alternative.

  15. Right on! That damn Citi is charging me 5.5%! My neighbor is getting 2.75% from the same bank!!! UNFAAAIIIIRRRRRR!!!!!!!!!

    Oh, this is under the “usury” threshold? At what percentage rate does a loan become rape?

    1. The percentage rate where you decide “nah”, but they forcibly make you sign the papers anyway.

  16. I’ve used a payday lender. The water pump on my car blew up between paydays and the cushion in my budget for that month had already been spent on another unforeseen emergency. Paid it off a week later with the cushion for next month. It CAN be used responsibly by people who aren’t being stupid with their money.

  17. So, what’s the correct amount to charge a guy who doesn’t have a bank and needs his check cashed?

    1. Whatever you both agree is reasonable.

  18. You know why people aren’t rushing to start payday loan places? The clientele. Nobody wants to spend all day dealing with desperate poor people. Ugh. Buzzkill.

    1. A friend from high school spent some time working the desk at a payday lender. They eventually fired him for failing to maintain the business’s professional image. Too slummy even for them. I had to laugh at that.

  19. A local Unitarian church started a no-interest pay day loan service several years ago. Did a ton of business. Almost bankrupted the church.

    1. I believe the federal tax law changed in the early 90s, not sure exactly when – but it?s been illegal for quite a long time for a non-profit charity to own a for-profit business.

      Aside from that – I can easily see how a church isn?t setup with the right temperament to succeed in that kind of a business.

  20. Anyone who spends two hours in criminal court will see a dozen cases of some poor schmuck fined an outrageous sum of money you know he doesn’t have. Almost always for insane things like public intoxication or possession of one joint. You know, the things police like to harass people fore because it’s low-hanging fruit.

    Where do you think the poor schmuck is gonna get the money to pay the fine? If he’s scum, he’ll rob someone else. If he’s not, it’s payday or car title loan shops. It ain’t the pawn shop because anything he could pawn wouldn’t be enough to cover the fine.

    Don’t like payday loans? The cause of their proliferation is big government.

    1. Meant “The demand driving their proliferation is big government.”

  21. Not everyone like taking pay day loans. But I think that it’s a good solution if you really need money. There are many pay day loan companies but not every company is really good. You can consider borrowing options from this lender. Here is a good pay day loan lender who proposes convenient loans with low rates 24/7 via internet. It makes easy the process of taking money.

  22. Time for the nanny government to allow consenting adults to make their own choices and stop trying to make decisions for them. These lenders obviously exist because there is a market and need for their product. The need isn’t going to go away but due to the nanny’s intervention into the personal lives of the citizens it believes it controls, the need will find a new market, and unfortunately a darker market.

  23. Checked out terms of use for loans on https://paydayloan.network/terms-of-use.html and I’d say that such a loan really can be an option in some situations. But obviously, it’s better not to get in such situations.

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