Payday loans and strange bedfellows
For those of you who don’t live in Virginia, the key piece of background information here is that the Virginia House of Delegates is generally controlled by the lunatic right. These are people who aren’t sure that contraception should be legal, who would rather see all of Northern Virginia permanently frozen into gridlock than raise taxes to build roads, who think that preschool for poor kids is a socialist plot. The Senate is usually more reasonable, even before the Democrats took back control in the last election.
So, I’m more than a little bit shocked to find myself supporting the payday lending reform bill adopted by the House of Delegates, rather than the sham reform being sponsored by Senate Majority Leader Dick Saslaw. It’s not a perfect bill –while it theoretically imposes a 36 percent cap on interest rates, it allows for fees to be charged on top of that, which drives the real cost of lending far higher. But it would be a good start, and would help prevent people from getting caught into an endless cycle of taking out another loan to pay off the first one.
By contrast, the folks who have been fighting payday loans — including the AARP, the AFL-CIO, the NAACP, Voices for Virginia Children, and the Virginia Poverty Law Center — say that the Senate bill could be worse than nothing. It’s hard not to conclude that campaign contributions are driving policy.
As previously discussed here, there’s a real need for low-cost small dollar loans for people without great credit. Even usurious rates can be worthwhile if the choice is losing your job when your car breaks down. I’m not sure what the best solution is. But a study from North Carolina — which banned payday loans a couple of years ago — shows that low-income people aren’t reporting hardship as a result of the ban.
Last time I posted about banking, reader Dave S. posted this link for the Predatory Lending Association. I assume that anyone who spends a minute on that site will figure out that it’s a parody put up by the opponents of payday lending. By contrast, I’m not sure that it’s immediately clear that the folks who were advertising on CNN during the coverage of the Potomac Primary results, with the URL "www.ReformPaydayVA.com" is the payday lending industry.
February 19th, 2008 at 9:36 am
If they’re not making any money, there won’t be anyone stepping in to replace them if conditions are made more stringent for the lenders: http://www.economics.ox.ac.uk/members/jeremy.tobacman/papers/profitability.pdf
Is this a good thing? Hard to tell.
February 29th, 2008 at 6:30 pm
You say it is not a perfect bill, so why are you supporting it? This is exactly the type of thing we need to stop! It is not a perfect bill, so we should make it a perfect bill. The fees are equivalent to 390% APR, and they are moving it to 36%, how is that a compromise? That is like me going to a house that is being offered at $390,000, and offering $36,000. Why should this work? Well, I can field that one, it won’t. What will happen is that the payday lenders will pack up and leave, and who suffers? The consumers! Here is an article that demonstrates what I am talking about:
Payday lenders are the perfect target for politicians that want to seem compassionate. After all, a $15 fee on a two-week $100 loan amounts to an APR of 390% if the loan is rolled over for a year (accruing $15 every two weeks). What could be more evil than charging poor people 390% interest, right?
A recent study by the Federal Reserve Bank of New York suggests otherwise. As reported in the March issue of Reason Magazine, the study found that the citizens of two states where payday lending is banned “bounced more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy more often”1. Comparing payday lending to other options, the Community Financial Services Association of America noted that a $100 bounced check garners a $54 fee (equivalent to 1409% APR) and a $100 credit card balance can garner a $37 late fee (equivalent to 965% APR). As the study’s authors write, “Forcing households to replace costly credit with even costlier credit is bound to make them worse off”.
And this is what Reason magazine had to say about payday loan bans:
Reason, March 2008, Page 10-11, Katherine Mangu-Ward
“A new report finds that banning payday lending, makes customers worse off.”
“Authors Donald P. Morgan of the federal reserve and Michael R. Strain of Cornell University found that the citizens of those states (the states where payday lending is banned) bounced more checks, complained more about lenders and debt collectors, and filed for chapter 7 bankruptcy more often. The correlation between reduced payday lending and increased credit problems, they write “contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to the substitutes such as the bounced –check ‘protection’ sold by credit unions and banks or loans from pawn-shops.”
Leave payday loans, they are helping those of us who can use them responsibly.
March 10th, 2008 at 10:00 am
McGovern’s not with you:
http://online.wsj.com/article/SB120485275086518279.html?mod=opinion_main_commentaries
March 29th, 2008 at 2:55 am
For those of you who value your freedom to make your own decisions in regard to your finances, and how you pay your bills, please read my Blog, “Pay day loan mis-information”.
There are people, including reputable news writers, who do not fully understand pay day loans, who are spreading mis-information.
Lawmakers, and politicians, are buying into this mis-information.
Now they want to protect us from ourselves.
It is important that we all understand a balance of all of the facts, before decisions are made, that effect something of such good use to so many good people.
Read the Blog as follows:
Pay Day Loan Mis-Information
Category: News and Politics
I recently read a Reuters news article, written by Nick Carey, Mar 23rd, 8:15pm ET, titled, “’Pay day’ loans exacerbate housing crisis”. I would like to clarify that there are some great inaccuracies and bias in this story that really must be pointed out.
I have had extensive experience with pay day loans, and, though I agree that the APR (annual percentage rate) is quite high, and people can get into trouble when they do not use these loans as they are designed to be used, this news report highly exhagerates the cost of a loan.
Read from the article as follows;
“A pay day loan is typically for a few hundred dollars, with a term of two weeks, and an interest rate as high as 800 percent. The average borrower ends up paying back $793 for a $325 loan, according to the Center.”
This is not accurate! And there was much more inaccuracy than this in the article.
A pay day loan from a legitimate financial retailer generally costs about $15 for every $100 up to $500. This means that for a loan of $100 for 15 days the charge will be $15, totalling the loan at $115, which must be quoted as an APR of 365%. the actual total pay off for a $300 loan is $345.
In reality it is only a fee that is being paid, not interest. However, government regulations require that it be quoted as interest, as an APR.
And, by the way, I don’t know where the “anti” pay day loan “spin masters” get their math, but the 365% quote is an APR, which means that if you were to pay off and take this amount loan out, over and over again, consecutively over 1 year, your fee would equal that of a 365% APR. It does not compound, or whatever “voodoo” the “spinmasters” would like people to believe.
So it should be clear that pay day loans are strickly meant, and offered, to be used as short term loans, and never on a long term basis.
If a borrower runs into trouble and falls short of being able to pay off the loan, legitimate financial retailers offer, for no additional fee, payment plans with CFSA, and ,in some states, state sponsored plans.
It also should be noted that these loans, and their payments or lack of payments never reflect on the borrowers credit report or history.
The only way that a short-term loan, a pay day loan, could build up to the absorbitent amount qouted in the news story, is if the loan were to be “rolled over”, which is highly illegal in nearly every state that regulates these loans, so, thus, it would be highly improbable that there would be an average of borrowers that pay such amounts.
Pay day loans are for exactly what they are named. A short term small loan to be paid off by the next pay date of the borrower.
These loans have saved many a borrower, in a temporary financial pinch, to pay some bill(s), from much harsher penalties and costs that are incurred by banks and credit institutions if checks do not clear or payments are late.
The proper use of a pay day loan actually shows a personal and professional level of responsibility when it is used properly.
Yes, people do mis-use these loans, people get into trouble, people borrow beyond their means, and there are less than savory lendors who do not do what is right in order to avoid such disasters for their borrowers.
Pay day lendors must exercise great responsibility to protect borrowers and potential borrowers from becoming victims of borrowing beyond their means. That might even mean turning down a less than able and questionably qualified customer from borrowing.
I am disturbed to also hear lawmakers and politicians who are buying into mis-information and threaten the reasonable management and existence of a very useful and helpful service to many people.
Bruce – Washington
June 6th, 2008 at 12:51 pm
I don’t think that the goverment should be allowed to put restrictions on payday companies. It is the consumers choice to use them. Payday Loan companies do not force there customers to have a loan.
June 16th, 2008 at 10:09 am
I feel stupid (and unmasked in my sheltered middle-class-ness) not to have thought about the connection between suppressing legal payday loan places and a likely resurgence of finger-breaking loan sharks: http://theamericanscene.com/2008/06/14/on-predatory-lending
September 13th, 2008 at 5:46 pm
Megan Mack weighs in, saying what I said, but more elegantly:
http://meganmcardle.theatlantic.com/archives/2008/09/just_say_no_to_usury_laws.php
September 18th, 2008 at 1:15 pm
Ta-nehisi Coates doesnt like payroll lenders, nor Al Sharpton:
http://ta-nehisicoates.theatlantic.com/archives/2008/09/there_is_no_black_leadership.php
December 24th, 2008 at 6:05 am
LA Times today notes that payday lenders are doing more loans to middle-class people: http://www.latimes.com/business/la-fi-payday24-2008dec24,0,3602054.story – does this mean there might be money to be made by doing them in a less predatory way? This assumes that middle-class people who needed them would shop more effectively for better terms.
May 21st, 2009 at 6:36 am
Chris Dodd loves payday lenders… http://www.huffingtonpost.com/2009/05/20/dodd-dinner-with-online-p_n_205629.html
July 23rd, 2009 at 1:40 pm
90% of payday loan applicants continue to take the loan even after it’s explained to them carefully: http://www.slate.com/id/2223378
September 9th, 2009 at 9:38 am
Payday loan folks are pikers compared to Wells Fargo.
http://www.nytimes.com/2009/09/09/your-money/credit-and-debit-cards/09debit.html?pagewanted=1&_r=1&hp
February 26th, 2011 at 7:42 am
Tribal payday lenders! what a long strange trip it’s been…
http://globaldebtsys.com/tribal-owned-payday-loan-companies-profit-rules