You will make very few friends defending the payday lending industry, the modern day loan sharks whose short-term cash loans to working people can have interest rates that soar into the triple-digits on an annualized basis.
Except they're not really interest rates. The loans are short-term -- generally about two weeks -- and if you were to extrapolate the amount paid for the loan to 52-weeks, yeah the interest rate is high. But you can't hold the loan for that long.
Payday lenders are the target of a lot of consumer groups, who charge that these lenders prey on low-income workers. Virginia is the site of the latest showdown between the industry and its critics, with one minister describing it as a "David vs. Goliath" battle in an Associated Press piece.
But it's really more like David vs. David. The fact is that payday lending just isn't that profitable of a business. Don't believe me? Take a look at the margins for some of the publicly traded payday lenders -- they're actually lower than some credit unions!
That's not to say that payday lending is good. It's actually a terrible deal for the consumer, and something that should be avoided. The problem is that the short-term loans have high costs for everyone involved: high default rates, high overhead for the lender, and that all requires a high "interest rate" if you want to call it that. If payday lending were so profitable, wouldn't someone else come in and do it for a little bit less money and make a fortune?
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Reader Comments (Page 1 of 1)
1-01-2008 @ 11:02AM
Abraham Hall said...
You are correct that payday lending fees are based upon your loan being due every pay period (usually every two weeks), but there is nothing that stops a payday lender from refinancing that loan over and over and over again for many more than 52 weeks. I am a former payday lending store manager (I worked for Check 'n Go in Washington, DC) I managed one of the largest volume stores in the company. The profitability of payday lenders depends on their ability to create long term dependence on the product - and they do this by loaning people more money than they can possibly repay, beginning a cycle of indebtedness that is hard for the consumer to end and most always ends with the payday lender making triple digit interest. I worked for a payday lender, I perpetuated the debt trap. I speak from personal experience. I'd be curious to know what industry PR or lobby firm you got your information from.
Lastly, if the product is so unprofitable for the lender (which it is not, incidentally), then maybe finally the payday lenders will agree and change their business model to exist within state usury laws instead of fighting costly political fights with tons of money they steal from hard working American families.
Abraham
1-02-2008 @ 7:24PM
Matt said...
Sounds to me like "Abraham" is the same shill for the payday lending opponents who is lying.
And even if Check n' Go's business practices weren't good, that says nothing about the practices of all the other lenders in the US.
The lenders I know -- and that is many -- know they are providing a needed service. These folks cannot go anywhere else to get short term credit.
1-09-2008 @ 1:36PM
Constance said...
Thanks for this information. It’s so easy to get on the payday bashing bandwagon. I think anyone who wants to get rid of payday loans in the name of “protecting the poor” is full of crap. If they really want to help people, they would work to create other alternatives or encourage financial educations programs instead of putting people out of jobs and taking away what may be for some their only option to help them through an emergency.