Payday lenders are predatory. They want to get people locked into a cycle of debt, so that they can charge many times the original amount in interest per year. I'm surprised to see anyone defending them.
Payday lenders don’t lock people in cycles of debt. What looks people in cycles of debt is that their income levels are marginal so any unexpected event can totally derail them.
I have a paid off car. When I got into a fender bender, I needed to pay $2,500 out of pocket to fix it because I don’t carry insurance for damage to my own vehicle. If I was poor, what would I do? I can go to a payday lender, who has to charge high fees because poor people are high risk. I’m caught in a cycle of debt—because I couldn’t afford that expense to begin with. But at least I can get around. If you take away that option, I don’t get my car fixed and lose my job. That’s the alternative.
Except the rule that is being killed is the one that told lenders they needed to check to ensure that the borrower would be able to pay the loan back.
In your case, with your car and your job, you would pass this test. And if you couldn’t then lending the money would put you in a worse position than immediate unemployment
I’m glad some upper middle class attorney or policy wonk at CFPB gets to make the decision that it’s better for me to lose my job than to deal with debt I can’t repay!
AFAIK, payday loan companies do require the borrower to be employed, hence the name "payday".
Let's say for example you have someone asking for a payday loan of $100. You are not 'required' to determine if someone can afford to pay that back or not. You offer them the loan, they take it. Turns out they can't afford to pay it back, so you sue them for over 36 times the amount. Now imagine that's not actually a hypothetical [1].
That's one real-world example of how payday loans are predatory. The incentive is to loan to people who can't pay it back, because you earn more in garnishing their wages than you do from the initial loan. A second example is imagine you offer them a loan for $100. Then you offer them a deal: I'll give you $200 for half the (initial) interest rate. They take it because you've convinced them it was a good deal, but they could only actually afford $100 and not $200. Now we're back to garnishing their wages and getting rich off of it.
This is why those regulations exist. This is an actual problem, not a hypothetical. The incentive for payday lenders is to scam people out of money because that's their entire business model.
[1] https://www.theguardian.com/us-news/2015/may/09/us-payday-lo...
This is very peculiar reasoning. Why did you go with, "payday lenders must be struggling to provide crucial services because there's one on every block", instead of, "there are payday lenders on every block because it's a stupidly profitable business"?
There’s lots of places where I’m not going to trust economic theory reflects reality. But this is an example of microeconomics out of a textbook.
What you're arguing here could seemingly be repurposed to argue, for instance, that companies should be able to sell stock to the public without SEC-mandated disclosures and legal process, couldn't it?
I can concede that payday lenders aren't "bad people" and still believe that payday lending should be sharply curtailed, and yet still not be a moralizer, I think.
It’s one of the most predatory types of lending that exists. They often provide loans with intentionally confusing and borderline disingenuous lending terms with the explicit goal of taking advantage of people.
> The result is denying poor people access to credit.
Lol, I mean, if being practically tricked into loans you can never pay off to the point that it drives entire cycles of poverty is your idea of credit, yeah, then sure, you’re right.
I think it sort of boils down to rayinier's wrong, or at least hopelessly unsophisticated, understanding of credit.
When you don't pay your landlord on time, you definitely enter a debt relationship with your landlord. That's credit in every sense but financial.
Payday loan companies securitized a form of credit that had low effective "interest" (e.g., late payment penalties) and converted it into something with high interest.
Yes, nobody wants to be evicted. But surely, in a strictly rational economic sense, landlords don't want vacant properties either. It's not so obvious what is the "efficient rate," as rayinier says, because based on eviction rates for late payments of rents, it's probably not that high.
Foreclosing on people's homes, of course, was a huge disaster and the source of an incredible amount of national economic and emotional misery. So again, just within an economic positivist framework, it's not at all as simple to arrive at "efficient" rates as rayinier assumes.
I'm not sure if payday loan companies, which charge a higher interest rate to essentially victimize the same population at an industrial scale, is an economic positive, you know? I wish he would just admit that while some human beings will sometimes be landlords, and therefore deserve some protections, no normal person will literally ever be a payday loan lender, so it seems fit that we ought to use a credit system (late rental payments) that people can imagine justice inside of rather than an usurious credit system nobody will ever be on the right side of.
Edit: I would also like to state that extending credit also increases demand, pushing up prices in the rest of the market, increasing the demand for credit for all players. This is exactly how housing bubble flames are fanned, and it applies at any level of the economy. If people at the bottom are unable to afford necessities, providing them more credit doesn't actually increase their capacity to afford necessities, it is simply a time shift. If that is the scenario that is coming up, a different solution must be found, otherwise you just end up with more interest going to people who already have the money. Classic Gamblers ruin.
Entire business models have been created to take advantage of and even maximize this type of information asymmetry. Legislation exists to curb the most egregious offenders.
You can argue whether or not this specific case is egregious enough to warrant regulation. But implying we’re all fully rational actors who can make perfect (or even good) decisions in times of great distress and who don’t ever need sort of safety rail to protect us from our own ignorance, urgency, or rashness is just arguing in bad faith.
Neither point is obvious.
Quite silly; that people in general are well modelled by the assumption of rationality is one of the most thoroughly disproven offer in the social sciences, and that the people who end up at the bottom end of the economic distribution disproportionately includes those who are particularly poorly modelled by the assumption of perfect utility maximization as if with full knowledge of the costs and utilities of all available should be fairly obvious.
There is only one universal freedom, the freedom of chioce. I think this is more important than any 21st century pay day lending problem. We need to preserve free choice not just for our generation/set of problems, but for all time.
Edit: Don't confuse living a long, healthy, happy life with freedom. They could not be more different.
Ultimately people would prefer to know that things are going to get better, but perhaps they don't have the tools and know-how to do it. Much like telling a depressed person they have a choice to not be depressed, someone desperately poor doesn't have the simple choice to not be poor.
Financial freedom can be thought of at many levels, some all the way up to super rich and able to subvert laws at their whim. In this context, I am meaning freedom from the emotional distress caused from being incapable of being secure in the knowledge that there is a high probability they will have a roof over their head and food to eat for at least a couple of months. In turn, this allows for forward planning, and forward planning is the manifestation of being capable of exercising choice with regards to that persons/family's future development.
So, considering that people are constrained by their environment, our "generation/set of problems" is absolutely relevant, suggesting there is some universal otherwise which can be preserved with impunity is akin to suggesting there exists/can exist a form of universal justice.
Edit:
What if I want to live my life paycheck to paycheck? What if none of what you just described about freedom from the emotional stress of finances matters to me? What right do you have to force me to make the "right" choices and be financially responsible? Why shouldn't I be allowed to hurt myself?
As for your statement about differing perspectives, I would argue that I'm talking about solutions for present problems, ie the practical side, whereas you talk about what should be, which may require a very large transition period, and thus is not useful at this point in time.
I think we also would disagree on the needs of the many outweighing the needs of the few.
> for present problems, ie the practical side
I see your point here, but we can't lose sight of the big picture. Compromising in the short term, no matter how many people it might help, seems like a bad idea to me.
However, I don't think that just because an APR sounds extremely large, that makes the loan predatory or otherwise unnecessary. Just like with housing and everything else, when you rent something for a short period of time, there is a fixed overhead, and if you annualize it you can clutch your pearls over how high it is. But that doesn't in itself mean it's not a useful or even vital service at a fair price.
If people need money for a few days to avoid being evicted, jailed, losing their job, whatever, and the APR includes, say, a $20 service charge, it seems disingenuous to attack it solely on the annualized interest rate.
You might as well say that we should eliminate $100/night hotels because that equates to a $3,000/month price which is clearly outrageous.
On an unrelated note, I wonder if the payday loan places are the same as the check cashing places where you take your paycheck if you don't have a bank account. Should public policy consider that attacking one side of the business might affect another?
The answer is yes! Fentanyl has a market. Student loans for a degree in Modern Studies have a market. Impossible health supplements have a market.
Selling products can certainly take advantage of a person.
Are you saying that a cancer patient ought not to use Fentanyl when Oxycontin no longer is enough and go directly to morphine? This is not obviously a "poor choice" from my perspective.
The parent comment had a parallel construction where the drug was the odd one out, having legitimate value in some contexts. One implication of that might be that the commenter was unaware of the legitimate value, because if they were aware, they could have avoided the unsatisfactory parallel.
> A payday lender would have to work hard to lose money, even though borrowers are generally low-income and have weak credit histories. Holding a "live" check as security gives a lender strong collateral and leverage over a borrower who, when faced with the threat of criminal prosecution and penalty fees, will keep paying renewal fees every two weeks when they cannot afford to repay the loan in full and walk away. With these renewals (or loan flips), they are never paying down the principal owed. In North Carolina in 2000, for example, only 6% of payday checks were returned for insufficient funds (NSF) and lenders recovered about 69% of the value on these. They also collected $2 million in NSF fees.
> In comparison, the credit card default rate, like the payday default rate, is also approximately 6% -- but the interest rate on a credit card rarely exceeds 29% (as opposed to payday loans that routinely charge 400% APR or more). Personal loans and car loans have default rates of around 2%, with APRs between 5 and 15%. Compared to other forms of credit, the exorbitantly high APR charged on payday loans is drastically out of proportion with the relatively normal risk involved in making those loans.
https://www.responsiblelending.org/research-publication/fact...
The whole page is worth reading.
These are short term (till the next payday) loans. Thats like saying a hotel room costs 36.5k/yr. News websites posting crazy 400% apr numbers are being deliberately misleading. When in reality its more like you pay a 20% fee to get money now and repay it next payday in 2 weeks.
>> Payday loans are often thought of as “two-week” loans, which aligns with the data’s median term >> of 14 days. However, since the terms of these loans are often tied to the borrower’s pay cycle, >> which can vary by employer and source of income, the average loan length is 18.3 days.
>> And while payday loans are marketed as short-term solutions — get cash now, pay it back in two >> >> weeks — the CFPB found that over the course of 12 months, more than one-third of borrowers will take >> out between 11 and 19 payday loans. Fourteen percent of borrowers will take out 20 or more payday >> loans within this same time period.
>> It’s on these borrowers that payday lenders make the most money. According to the CFPB, 76% of >> lenders’ fees come from borrowers taking out at least 11 loans in a year.
from: https://consumerist.com/2013/04/26/the-average-payday-loan-b...
I would love to see some data, because it all looks to go one way. The rates never fall, only rise.
I see a bunch of independent payday lenders with similar rates. Are they a cartel and fixing their rates? Or are they in competition and all offer reasonable low rates considering the default rate of their clientele?
Look at the dump that is Wells Fargo and the their precious behavior with deposit/withdrawal ordering in daily reconciliation to screw people into overdraft fees.
Drawing the line at payday lenders seems super arbitrary.
Banking dream is lending money to people who don't need it.
https://mises-media.s3.amazonaws.com/Defending_the_Undefenda...
Payday lending offers a very specific type of service. Extreme short term loans. Like all loans, there is risk associated. Unlike other loans traditional payment plans do not really apply. Interest rates will be different. However, with the market operating appropriately, people will move towards the better options. This might include, better service, better interest rates, better contractual agreements, who knows. It's the free market.
I wasn't even defending it. I was pointing to an economist who is a noted hard libertarian type who did defend it, in the hopes that someone might read it and think to themselves - for a fat second - "wow some people do not see the world the way I do", you have utterly failed that test.