Payday Lending: Why Isn't Everyone Doing It?
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.