Payday lenders try to keep the wolf from their doors

The Wall Street Journal [subscription required] reports this morning that payday lenders are trying to keep the Chairman of the House Committee on Financial Services, Barney Frank (D-MA) from imposing regulation on them.

In case you have not taken out a loan from one of these outfits, payday lenders charge slightly above the prime rate to give cash advances to poor people. Specifically, they charge 390% annual interest rates to people who are so desperate for cash that they take out short-term loans using their paychecks as collateral.-- and the loans must be paid back when borrowers receive their next paycheck.

While lenders say this structure is necessary to cover costs, offset higher default rates and still turn a profit; critics -- including Barney Frank -- say the rates are exorbitant and often trap financially strapped borrowers in a cycle of paying additional "rollover" fees to renew the same amount of principal. To keep the wolf -- in the form of Barney Frank -- from their doors, the payday lenders have proposed to voluntarily limit advertising and offer a once-a-year break to borrowers who don't pay back loans quickly.

Between the subprime mortgage lenders and these payday lenders, there's a big industry dedicated to extracting profit from Americans who can't keep up. 390% strikes me as a pretty high interest rate. And if you have the stomach for it, you can profit right along with the likes of Advance America Cash Advance Centers, Inc (NYSE: AEA), Cash America International, Inc. (NYSE:CSH), and QC Holdings (NASDAQ:QCCO), whose stocks have risen 5.4%, 64%, and 23% respectively in the last year.

Peter Cohan is President of Peter S. Cohan & Associates, a management consulting and venture capital firm, He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in Advance America, CashAmerica, or QC Holdings.