They also wouldn't be making money. Keep in mind:
1) APR rolls up all interest, charges, surcharges, fees, etc. (which is fine)
2) Small short duration loans have a significant amount of paperwork (and it just increases with new "know your customer" laws, money laundering rules, anti-terrorism rules, etc.), plus all the normal overheads of business: Staff, training, rent, buildings, insurance, whatever.
A fair interest rate on a loan of the type being discussed is, sure, a few percent, maybe even under 10% (although, you know, my credit card has a higher rate than that, so let's not go overboard here). But a fair fee to process a loan app is going to be fairly high; $20-30 is honestly low if you're doing the application in person at a storefront. But if you lend someone $300 for two weeks at a 5% annual interest rate and a $25 fee, the APR isn't 5%, it's well over 200%.
Nonprofits which have tried to venture into the payday lending space have found themselves forced to charge eye-watering APRs, not because they're trying not to "leave money on the table", but because you cannot usefully compare an APR between a 20 year mortgage and a two week payday loan, because the cost of processing an app for a $500k mortgage and a $50 payday loan is a lot less different than the face value would suggest.
I see a lot of people are talking about defaults, but it's not the defaults (which aren't even that high), it's the fees when calculated on low value, short term loans.
Edit: Not saying payday lenders are amazing (or even that they should be legal) just that a naive comparison of the APR of a payday loan to an auto loan conceals more than it reveals. Payday loans are a very expensive product which some very poor people really, really need. Wishing it was cheap doesn't make it less expensive; banning it doesn't make the need go away. There's not a lot of good answers.
What happens if you borrow $200 and pay it back at $20/month over the course of a year? Then next month you don't need another loan because you still have $180 left from the original loan, instead of having -$30 from having already paid it back with interest.
> Then next month you don't need another loan because you still have $180 left from the original loan, instead of having -$30 from having already paid it back with interest.
As an empirical matter, a lot of the people who do badly by using payday loans will not behave in the way you're suggesting -- they will spend the money they have, and are likely to need another loan next month anyway (although getting it will be harder since they now have an outstanding loan). People who currently use payday loans responsibly won't have that problem, but they will have the problem that you just increased their borrowing costs by 33%.
When they only have to make a small payment, they effectively already have another payday loan equivalent. Before, they had to scrounge up $230 to pay off the loan, and they could get another $200 loan back out immediately. Now, they can take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10.
In other words, any money they would have gotten from 'another loan' is an illusion, because that loan was sourced directly from their own wallet, with someone else taking a cut. They don't need 'another loan'.
For someone's borrowing costs to increase, they have to be in one of two scenarios: The first is taking out a payday loan once and never rolling it over. That scenario is not a big deal because the total cost is small by definition. The other scenario is someone that takes out the same value in one-year loans every month that they would have taken out in payday loans. This is not a reasonable comparison, because this person has ten times as much outstanding debt.
> In other words, any money they would have gotten from 'another loan' is an illusion, because that loan was sourced directly from their own wallet, with someone else taking a cut. They don't need 'another loan'.
Well, obviously exactly the same argument applies to the first loan -- it's sourced directly from their own wallet, with someone else taking a cut. But you don't see a lot of people arguing that therefore there was never a need for any lending in the first place (actually, you do; old religions have quite a bit to say about this. You don't see a lot of people making the argument today).
You're ignoring the point I was making, though. Compare: http://slatestarcodex.com/2014/05/25/apologia-pro-vita-sua/
> I do occasional work for my hospital’s Addiction Medicine service, and a lot of our conversations go the same way.
> My attending tells a patient trying to quit that she must take a certain pill that will decrease her drug cravings. He says it is mostly covered by insurance, but that there will be a copay of about one hundred dollars a week.
> The patient freaks out. “A hundred dollars a week? There’s no way I can get that much money!”
> My attending asks the patient how much she spends on heroin.
> The patient gives a number like thirty or forty dollars a day, every day.
> My attending notes that this comes out to $210 to $280 dollars a week, and suggests that she quit heroin, take the anti-addiction pill, and make a “profit” of $110.
> At this point the patient always shoots my attending an incredibly dirty look. Like he’s cheating somehow. Just because she has $210 a week to spend on heroin doesn’t mean that after getting rid of that she’d have $210 to spend on medication. Sure, these fancy doctors think they’re so smart, what with their "mathematics" and their "subtracting numbers from other numbers", but they’re not going to fool her.
If we divide payday lendees into two classes, the ones who get stuck in a cycle of rolling over their loans are behaving like the heroin users. They won't be helped by the higher-cost lower-APR loan because they will not "take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10", and don't understand that process. They will take $20 from their paycheck, pay off $20, spend the rest of their paycheck on analogical heroin, and wind up with $0, which is less than $10.
The ones who don't get stuck in a cycle of rolling over their loans won't do that, but they weren't doing it anyway. You haven't benefited them; you've made their operating costs significantly higher. No one benefited from your change to the system.
Because loans give you money now to repay later. It's not loans that are unnecessary, it's rolling over loans that is bad when you could have gotten a longer loan at the start.
> You haven't benefited them; you've made their operating costs significantly higher. No one benefited from your change to the system.
You're forgetting your own words. Getting extra loans when they already have loans becomes harder. They won't be able to get so many loans that the cost is higher overall. They will be stuck with 'merely' 2-3 times as much loan money, for example. It will be impossible for them to have higher costs.
> They won't be helped by the higher-cost lower-APR loan because they will not "take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10", and don't understand that process. They will take $20 from their paycheck, pay off $20, spend the rest of their paycheck on analogical heroin, and wind up with $0, which is less than $10.
You're not arguing against what I said, you're just saying that the $10 they didn't spend on fees gets spent on something else. Well that's the goal, isn't it?
They always get their paycheck. They don't have to understand loaning for that to happen. At the end of they day they have $210 in their pocket when they used to have $200. They might spend it all on heroin, but they will have $10 more of it.
> http://slatestarcodex.com/2014/05/25/apologia-pro-vita-sua/
Okay, reading that I see the following quote:
"I think that they would be literally unable to summon the motivation necessary to get that kind of cash if it were for anything less desperate than feeding an addiction."
That's an extremely valid argument for that particular situation, but it does not apply to paycheck money. You already put in the effort, and earned it. You're just making a slightly different transaction on the way home.
> That's an extremely valid argument for that particular situation, but it does not apply to paycheck money. You already put in the effort, and earned it. You're just making a slightly different transaction on the way home.
If you read even farther than that, you'll see the author apply the same argument to his own time, which everyone earns equally. The easiest and most common way to find the money for something is to take that money away from less-important uses, not to earn extra money.
Pay $40 in interest every 52 weeks, annual cost: $40
Pay $30 in interest every 3 weeks, annual cost: $520
> As an empirical matter, a lot of the people who do badly by using payday loans will not behave in the way you're suggesting -- they will spend the money they have, and are likely to need another loan next month anyway (although getting it will be harder since they now have an outstanding loan).
That problem is not caused by lenders.
That's what I'm saying. Making the lenders change won't address it.
If your analysis is correct they could do away with the branches and charge far less... Maybe make it app, even poor people have smartphones.
Credit card rates are effectively 0% if you pay off your statement balance in full, whereas these rates you always have to pay.
They have to charge a high enough rate to not lose money. My big problem with payday loan companies is that they do a very good job of hiding their true costs to their customers.
If we completely ban high interest rate loans, however, the result would be no one would loan money to a high risk applicant. There are situations where a high interest loan is preferable to no loan at all.
I don't know LendUp personally, but it seems like they're trying to be socially responsible.
http://thehill.com/regulation/237538-borrowers-default-on-ne...
> In studying payday loans in North Dakota, the Center for Responsible Lending found that nearly half of all borrowers default on a loan within their first two years of borrowing.
At that default rate, you will not exist as a lender charging low interest rates.
Check my math here, so lets say you charge 10% for 30 days (120% APR) so your $200 loan has a $20 interest fee. Now if every year, one month out of 12 the lender turns out to be a deadbeat and doesn't repay anything, your net income on the $200 for the year is $40 and 1/12 or 8.3% of your loans aren't being repaid. $40 is 20% of $200 giving you a net APR of 20%.
I have to take the North Dakota numbers with a large grain of salt. It seems like if 25% of your lenders were defaulting and you were not re-lending to them, you are doing something else wrong.
[1] http://www.creditcards.com/credit-card-news/credit-card-deli...
EDIT: Rereading your comment, I agree your math is sound (even with an assumption or two in there). The problem is we need a larger corpus of payday lender data. Anyone know where we can get that?
Isn't the issue that Google is making a statement about the same issue while taking the opposite stand.
No different (my opinion, two cents) then Google banning bank ads but allowing credit unions. Its a bit more gray since LendUp is still a for-profit concern, but it appears they're making an effort to hold themselves to a higher standard.
And it is within our rights as consumers to subject them to scrutiny and higher standards (Don't be evil) and for governments to subject to regulation.
Btw, EU is about to slap them with Billion dollar lawsuits for anti competitive behavior. Search for it. Maybe you can't lol.
All giants make mistakes and fall. Google+ etc.
Amazing people are so religious about Google.
Then what happens to the person who was delinquent twice but still needs a loan?
The lending market isn't a perfectly free one, with rules that are good in many cases, but restrictive in others.
If the rules are restrictive enough, I'd ask your question as "I've proven I didn't pay as agreed the last two times; will you give me some money? I'm totally going to pay you back."
The point I was trying to make is that, if there is a spectrum of payday lenders, the lowest cost/least bad ones might have the "two strikes and out" rule. There might exist worse lenders (as measured solely by APR and fees, not a moral judgment) that would still be in the market for that business.
Granted, it could be right at an invisible tipping point, but let's be honest.
Yes? That's like a month's food for some folks.
(it was rice, beans, and whole frozen chickens + volunteering at a homeless shelter which bought 1.5 meals a day)