Payday Loans are Not Evil
More and more these days, I see people calling out companies that offer payday loans. “They’re evil!” “It’s predatory lending!” are the words that you’ll hear anytime you mention payday loans. What do I think? It’s all a load of bull, plain and simple. There is nothing inherently evil or wrong about payday loans. While I won’t be taking out payday loans anytime soon, I don’t believe that they constitute predatory lending. Remember, payday loans are some of the highest-risk loans, to the highest-risk clients around. The companies willing to take that risk deserve to earn an excellent profit for their efforts.
Let me put this another way. Let’s say that you are considering two different investments. One is very low-risk, and has averaged a 5% return over the last 10 years. The other choice is a very high risk investment - over the years there have been crazy high spikes in value, but there have also been extreme drops in value. The average return for this investment has been 14%. If you’re going to invest in stock B, you would certainly want the chance to earn a higher return, wouldn’t you? Investing is all about risk and tolerance. If you are willing to bear a higher risk, you deserve the chance to reap greater rewards. If you’re more conservative, your return is likely to be less spectacular.
Moral of the story
Payday loans are not a good deal for the consumer. There, I said it. There’s no question that you’ll get socked with a hefty fee & interest rate if you take out a payday loan. There are almost always better ways to resolve your financial situation than a payday loan - understand that they are your last resort. If you are short on cash now, what makes you think you’ll be able to comfortable pay off the loan + interest in a couple weeks, and still have money to live on? Think long and hard before going this route, and explore every single other option first.
Non-Profit Payday Loans
Tricia from Blogging Away Debt wrote recently about Non-profit payday loans. They do offer better ( though still extremely high ) interest rates, which puts things into perspective a little bit. If a non-profit organization must charge 252% interest to cover their costs and avoid a loss ( while not making a profit ), then the higher rates charged by for-profit businesses don’t seem as extreme. Just something to think about.
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lmedsker said,
Wrote on August 29, 2007 @ 2:25 pm
I think the comment “If a non-profit organization must charge 252% interest to cover their costs and avoid a loss ( while not making a profit ), then the higher rates charged by for-profit businesses don’t seem as extreme” is extremely enlightening.
So, $9.90 per $100 is equivilant to 252% APR. Payday lenders usually charge $15 per $100 (391% APR).
Just goes to show you that it’s expensive to offer short term loans and that applying an APR may not make sense if the loan is for less than a year.
Either way, payday loans are cheaper than bouncing a check or paying a bill late.
Prince of Thrift said,
Wrote on August 31, 2007 @ 12:41 pm
sorry, but they are predatory. High risk can be capped at 36% like the feds did for these type of loans made to military personnel. Charging an APR of 100%, 200%, 500%, 700% or even 1000% is predatory. Pure and simple.
Penny Saved said,
Wrote on August 31, 2007 @ 12:48 pm
Nope. If a person can’t get a loan from any other source, there’s a reason - they’re extraordinarily high-risk. Back in the old days, these folks wouldn’t be able to get a loan anywhere. Now they can - they just have to pay for it. Not predatory - just high-risk.
lmedsker said,
Wrote on August 31, 2007 @ 12:58 pm
Payday loans can’t be offered at 36% APR. Plain and simple.
You may want to check out a recent NYT Article discussing a payday loan product being offered by the Goodwill, a non-profit, tax-exempt charity. The Goodwill charges customers $9.90 per $100 borrowed for the two-week term (252% APR) for their “Good Money” payday loan. And this is only to break even.
For-profit payday lenders charge an average of $15 per $100 borrowed (391%) APR) per the two-week term, while also paying taxes, employee salaries and health care, rent and other business expenses. All while trying to make a profit. The $5 more they need to keep their businesses running and make a profit allows them to provide a service that is a good deal for the borrowers, employees and the tax coffers.
If the Goodwill breaks even at 252% APR…there is no way that a for-profit lender can offer payday loans at 36%.
jtiv said,
Wrote on August 31, 2007 @ 1:57 pm
There is a great deal of misunderstanding and incorrect information regarding payday loans and the people who use the product, most of it coming from people who have never used or needed a payday loan. First, since a payday loan is typically for 2 weeks, and most people don’t understand how the APR is calculated, using the APR (annual percentage rate) is very misleading.
Simply put, the APR for a payday loan is presently calculated by taking the fee divided by the principle and multiplying it by the number of payment periods per year, then multiplying by 100 to get the percentage. For example, for a $200 payday loan with a fee of $30 for 14 days, the APR is calculated as follows:
30 / 200 = .15 x (365 days per year / 14 day payment period) x 100 = 391.07 % APR
Now take into account if other fees or payments were put into APR’s:
A $1.50 ATM fee on $50 instead of going to the bank the next day
1.50 / 50 = .03 x (365 days per year / 1 day payment period) x 100 = 1095% APR
A $35 late fee on a $100 credit card payment for a payment that is 7 days late
35 / 100 = .35 x (365 days per year / 7 day payment period) x 100 = 1825% APR
A $24.00 bank overdraft fee on a $25 check until the direct deposit arrives in 5 days
24 / 25 = .96 x (365 days per year / 5 day payment period) x 100 = 7008% APR
So, taking the given equation, and limiting the loan to an APR of 36% would allow for a company to charge about $1.38 per each $100 loaned. Since a non-profit company has basically said it needs to charge $9.90 per $100 and is still not completely covering costs, then there is no way any business could survive with a 36% APR cap. Would that be fair to take the option of a payday loan away from the thousands of hard working Americans that responsibly use the product to bridge the gap between paydays?
dong said,
Wrote on September 13, 2007 @ 12:56 pm
jtiv, that’s a great example with the ATM fees to illustrate that payday loans aren’t as evil in itself as they look. I don’t like payday loans, but the fact is the problem isn’t the loan itself, but why people are in the position to need them… Bad credit, poor financial planning. Pay day loans are the result of those things, and they certainly don’t help to make the situation better, but let’s attack the root causes…
hank said,
Wrote on October 13, 2007 @ 8:59 pm
I have been in both boats before - I don’t blame them for taking a penny where they can, but at the same time, it is really a pain in the a$$ to have to worry about giving them such a chunk ahead of time. Obviously the key point is to not have to get into it in the first place!
Jonathan Vajda said,
Wrote on December 15, 2007 @ 11:11 pm
First of all, let’s admit this simple truth: Payday loans are not evil in-themselves.
Now, why is this the case? It is not predatory for the same reasons as stated by the informed few. But let us consider how a payday loan can be more cost-effective and practical than some other means:
1. A credit card that charges 18% interest.
2. Overdraft or non-sufficient funds fees.
3. Wiring money from family or friends.
1) A credit card, a very common method of getting into debt for a month or so to cover large expenses, can have horrible, lasting repurcussions from continuous debt. There are so many credit card companies because there is simply so much money earned from credit card debt that they can all be supported by the consumers. By contrast, a payday loan store may never report to a credit agency.
2) Banks, the best way of doing money in our economy, correct? Suppose you have a checking account and accidently write a check for $100 more than you thought you had in your account. It is going to bounce. The wonderful bank doesn’t mind. They will only charge you 30 bucks in many cases. A payday loan, according to Michigan’s state regulations, cap the fee for a $100 payday loan to only $15.45. Get that loan, deposit it into your account, then while you could have had a $30 blunder, instead you just reduced it a $15.45 blunder.
3) In that same scenario as the above, one could wire money from a friend or family member to cover the account issue. However, Western Union is likely to be $14.99 for the transfer, and I am not certain about MoneyGram. (this information is current as of my posting this). The local NationalCity bank will wire it over for 17 bucks. Payday loans don’t look so evil, now do they?
I work for a payday advance store. So let me inform for a moment further. Many of the customers that this store targets are people who need financial help. By their very nature, many of them have a hard time managing their money. Getting them to plan a budget and focus on paying back the loan without reborrowing (an admittedly common transaction after paying off the loan) is rather difficult. I personally offer free advice to make the best of our service and get out of debt fast. Antithetical to the business-scheme, but it is congruent with the purpose of a loan — to help someone through a financial issue.
After seeing all the customers, I hope I have learned to make margins of error in my spending and keep track of where my money is going. I will, as PennySaved has reminded us, regard the payday loan as a last resort. I personally refuse to spend my last paycheck, so that if I am in it deep, I have a whole paycheck as a buffer. It works almost like a payday loan, only to myself and it is free. Beyond that, I add more safeguards such as a few hundred dollars in case my car decides to break. On top of that, I will admit I do not use my checkbook ledger, instead I keep track of all my accounts in spreadsheets and I back up the files regularly. I keep my receipts to append to the documents.
These safeguards I just listed provide security in the same way that payday loan customers need, but do not create for themselves. Save yourself some hassle and some money. Get smart and use your money wisely, knowing all the choices and margins of errors you need for YOUR budget.
Jonathan Vajda said,
Wrote on December 15, 2007 @ 11:19 pm
P.S.
Payday loans are usually given on a FEE basis, not “interest.” They go for 1, 2, or 4 weeks, typically. However, the fee does not change based on time (interest = principle * rate * TIME).
Pastor said,
Wrote on January 16, 2008 @ 6:33 pm
Payday “loans” are predatory because they depend on desperation and, being unregulated, are allowed to keep people in debt.
First and foremost, as has been poorly mentioned in this thread, payday services do not loan money — they rent it. Organizations that lend money are required by law to apply a portion of each payment to the principle. Thus, eventually, the loan is repaid. Organizations who rent money are not required to apply any portion of a payment toward the principle, so after paying a debilitating payment, the entire “loan” is still outstanding.
Second, payday “lenders” prey on desperation. The original author said it best. He didn’t want to ask family or friends for help, and didn’t feel he could or should wait to fix his car. He was desperate to avoid embarrassment and inconvenience, and there was the payday “loan officer” waiting to take a big chunk of his next paycheck to assuage his desperation. For every person helped by a desperation “loan,” there’s a small army that face bankruptcy.
I’m a pastor, and several families in my congregation are suffering from payday loans. Their stories are similar to the original author’s — except that due to hiccups and problems, they weren’t able to pay off the “loans.” They’re learning a hard lesson about giving in to desperation. I have one family that’s paying 40% EACH MONTH on $1000. Yup, that’s $400 each month, and the next month the $1000 is still due. The family has been suffering now for ten months — they’ve paid off the loan FOUR TIMES and still have no way to solve the problem because they never have enough money to actually pay down the principle. Payday loans quickly become shackles.
Is this fair? To whom? The lender? “Let the buyer beware?” Liars. That’s like excusing Exxon for charging the highest gasoline prices in U.S. history “because there isn’t enough supply” and then taking the largest corporate profit in U.S. history, which wasn’t possible without having enough supply. There isn’t an excuse for exorbitant greed and payday lenders shouldn’t have the right to charge debilitating fees under the guise of “high risk.” Another of my families was told he’d be charged criminally for check fraud if he didn’t meet their fee every month. He wasn’t told this when he got the “loan.” He was told this a month later when he didn’t have the money to pay the fee because gas prices went up. Now he’s having trouble feeding his family because he’s terrified of going to jail for check fraud. As far as I can tell, payday lenders go out of their way to make the “loans” as low risk as possible — and their profits prove it, they make money hand-over-fist.
Besides, any industry that feels it must advertise, not for its services, but to explain why their services are fair and legal, is predatory by definition. The commercials have been running in my area for weeks.
If the argument in favor of payday loans is that people tend to live paycheck-to-paycheck and may only need the loan for a week, my argument is, learn to do without for a week. No “lender” should be allowed to rent money. In the good old days, this was known as loan sharking.
Harm said,
Wrote on March 8, 2008 @ 1:19 am
How much, then, does someone have to charge before you say
they shouldn’t be in business? The loan shark, after all is
filling a need catering to HIGHER risk clients, who might not
even qualify for a payday loan. He might say, “it’s just
business…” I agree with you, payday loans aren’t themselves
evil, but where would you draw the line?
Penny Saved said,
Wrote on March 8, 2008 @ 9:10 am
In every lending situation, there are two sides - that’s something we should not forget. Just because someone is willing to lend money with certain terms, fees, and rate, does not mean that a borrower has to take them up on it. If people stop borrowing money with unfavorable terms, then the unfavorable terms will eventually become more favorable.
Jonathan Vajda said,
Wrote on March 8, 2008 @ 4:54 pm
“I’m a pastor, and several families in my congregation are suffering from payday loans.”
Are they really suffering from payday loans, or a general lack of financial responsibility? Honestly, the same argument could be said that my parents are suffering from payments on a second mortgage, or my friends from college loans,… you name it. It isn’t the medium you use, it is the way and intent you use the medium. And what about the church, why are some in need among you? Can’t they help so that they get out of debt?
And how is a pastor an authority in finances? I mean, sure, they can give counseling in general, but they are not typically trained in economics, finance, accounting, or marketing. However, if this is an appeal to an authority of morality, I am a Christian (and plan to attend seminary in a few years, after I save up money) and I disagree with what Pastor said.
“No “lender” should be allowed to rent money. In the good old days, this was known as loan sharking.”
In business, what is a lender who does not rent money? Not a lender (or not one for long!). Maybe I misunderstand the meaning of renting money, but I would definitely not say it is loan-sharking by definition.
And as far as citing a real authority of morality:
Exodus 22:25
Leviticus 25:36-37
Deuteronomy 23:19-20
- Those passages are not applicable. We are not Israelites under the Law.
Prince of Thrift said,
Wrote on March 8, 2008 @ 8:48 pm
That’s true, but other credit issuers try to, in some part, weed out the irresponsible ones. Payday loan places on the other hand take advantage of these people and make their situation worse by not offering them any real help. If you believed their commercials, then everything would be fine, but instead their real customers and targets are people that have no business getting a loan in the first place at any interest rate.
Penny Saved said,
Wrote on March 11, 2008 @ 6:00 pm
Payday loans companies are not in business to help people with their finances… they are in business to loan money.
By the same reasoning, fast food chains should not sell burgers and fries to overweight people. Of course that’s ridiculous - could you imagine the uproar it would cause if someone were refused a meal because of their size?
cheryl said,
Wrote on April 11, 2008 @ 10:49 am
Payday loans are stupid, period! I think you’re just playing devil’s advocate for the sake of collecting comments.
Penny Saved said,
Wrote on April 14, 2008 @ 7:27 pm
Sorry Cheryl, I really do feel this way about payday loans. They’re not a *good* choice, but certainly not inherently evil. One should only proceed with a payday loan if all other options are exhausted, and one knows the risks and costs.