Expensive Loans to Desperate People Built the $90B Payday Loan Industry
bloomberg.com
bloomberg.com
morally: because it is bad for profit and growth to be the ultimate motive just as soon as it requires you to treat people as things. The economy is a fine servant and a terrible master.
People who have shifted into a permanent state of servicing high-interest debt tend to be useless to the economy once they've entered that state. Unable to consume much (and this is still a consumer economy), unable to train for new work, probably overrepresented in public welfare programs for which others foot the bill. Literally the only "profit and growth" involved is for whoever holds the debt. The overall economic effect beyond a few big bondholders is quite negative.
Just about any law might serve as an example here: Murder isn't allowed, even though it might be very good for a business that offered it as a service, or a business that endeavored to literally kill off its competition.
That's admittedly an extreme example, so consider some a bit more banal: food quality regulation and ingredient label laws, or safety features built into cars.
The entire concept of law intrinsically, implicitly, exists to limit some behavior that might be advantageous to one person or group but not to others or society as a whole. And so once you accept that laws of any sort are a necessary part of society, you're no longer arguing about something like whether or not laws and regulations should impinge upon a free market pursuit of profit-- that is a given. Instead, you're simply arguing about where the line should be drawn.
Isn't it called "interest"? I take your point though. Usury sounds a bit dirty :)
But in short, if I'm getting this correct, usury is lending for which the recourse of the loan is not limited to some specific and concrete piece of collateral. A home mortgage is not usury, because the recourse for the loan is repossession, and the loaner does not (in the ideal case) have any further ability to claw away assets away from you. A critical aspect of this is that the lendee is not in any sense enslaved by this loan, because in the worst case scenario, they walk away from the loan, the home is repossesed, and the case is closed, and life goes on. (Your credit rating will also take a hit. One could quibble around the edges about this, but I suspect that news of the fact you fail to honor your loan obligations is going to get around one way or another, even in an older era.) Sure, it sucks that they may have lost their home, but at least they are not carrying that burden forward and are not a slave.
I'm speaking of the standard modern US home loan. All it would take for them to become usurious is to start including clawback provisions above and beyond the collateral, and while I'm not specifically aware of that happening, I'd personally lay money there's someone out there making such loans.
I suspect some payday loans are usurious, and some may not be, but I gather most of them have substantial or unlimited recourse to recover their monies?
Student loans are usury; there is nothing that can be repossessed. Our government is a full and willing participant in the usury, providing the money, special dispensation that such loans are very hard to discharge even in bankruptcy, and the incredibly self-serving Public Service Loan Forgiveness program: https://studentaid.ed.gov/sa/repay-loans/forgiveness-cancell... , which is totally not debt slavery how dare you think our government engages in that, it's just a friendly loving way of getting your loans forgiven if you spend ten years working for them in an approved manner.
Note that "outrageous interest" isn't necessarily part of the deal; the recourse for that is to simply not take such a loan. Non-usurious lending with outrageous interest rates still doesn't enslave you, because you can walk away forfeiting the collateral, and you have a clean slate. An usurious loan even with a seemingly low interest rate (or hidden fees or whathave you) can still enslave you.
What you get when you take a humanist perspective (ie, "people first") espoused by someone who grew up under the depredations of communism but is also aware of the problems of capitalism makes for very lucid and interesting thoughts!
http://w2.vatican.va/content/john-paul-ii/en/encyclicals/doc...
- Banks
- Credit Cards
- Retail installment contracts
- Pawn brokers
- Licensed lenders
And guess what a "licensed lender" is? Anyone who has a net-worth of $25,000 who files a form with the DBO.
Functionally, Usury laws only apply to the mob.
I don't theoretically have a problem with short term loans for one-off emergencies, but if you're living paycheck to paycheck, emergencies happen all the time and it's incredibly easy to get sucked into a downward spiral and become a "repeat customer". So, I can't see how private industry can fundamentaly solve the short term loan problem, because they will always want repeat customers.
Anyway, just because the photo in the article is a street corner payday lender, please don't think this leeching industry isn't in the virtual world as well.
* Selling their debt is quite profitable for payday lenders, so they are incentivized to make bad loans.
* Logically you can't pay a payday loan back of you're living paycheck to paycheck.
* Payday lenders nearly universally skip around federal and state regulations by incorporating in Indian tribal areas
Most people do payday lenders and installment lenders together. While there are bad players in every market, the competition/state/federal oversight in the installment space makes it a much better behaved industry.
The problems are
(a) when the fees aren't clearly expressed (disclosure laws are OK, not perfect, about making sure people see "Your loan of $X will cost $Y, at %ZZZ APR")
(b) debt that isn't repaid in one cycle, leading to repeated loans. There should be a limit of 1 or 2 payday loans per year, after which it's clear that the borrowing is unsustainable, and the borrower should either find a proper long-term loan or make a sacrifice (sorry, libertarians).
The only way out of these predatory loan cycles is for poor people to act like rich people -- take out a big loan and refuse to pay it back, then file bankruptcy (aka "get off the gride and live a cash-only lifestyle so creditors can't find you").
The US Consumer Finance Protection Bureau was working on this problem before Trump Administration gutted it.
Debt collectors know that they probably can't collect most of the paper they buy. This is especially true for non-exclusive paper and so they buy it for pennies on the dollar. Bad loans are one of the major losses (after employee expense and legal fees) for most payday lenders.
> * Payday lenders nearly universally skip around federal and state regulations by incorporating in Indian tribal areas
The Scott Tucker case shows the courts have decided not to allow the rent-a-tribe defense unless the tribe truly owns/operates the company. Having them get 1% of the profits and a couple call center style jobs isn't enough to make a payday lender be considered a tribal company anymore.
Source: Wrote the lending software for payday lenders.
Edit: To be clear, pennies on the dollar tends to mean less than $0.10/dollar average for debt purchasers. The loan company is losing over 90% of the principal they loaned out and are obviously not collecting the additional interest/fees that make these types of loans so expensive to pay back.
Are you curious what he does for a living now?
He is President of a payday loan company.
Hope you’re proud of yourself Tim.
https://www.cbsnews.com/news/private-equity-firms-are-the-ne...
wikipedia.org/wiki/Timothy_Geithner
tells a pretty positive story, with a mixed bag of wins and failures.
The bailouts should have been a payday loan with punishing interest rates. Instead the bailouts showed that all the talk about creative destruction and free markets where the strong survive applies only to the little guy who loses his job or home . As soon as the big guys feel the pain the rules get changed quickly.
That said, higher risks require higher returns or the alternative is the risk is simply not taken.
Would be a nice way to fix the headline.
That statistic sounds misleading. Suppose you have one guy who takes out a payday loan every two weeks (in a cycle of debt, causing more harm than good), and six guys who take out a payday loan once a year (helping with emergencies, causing more good than harm). In that scenario, two things are simultaneously true:
- 80% of loans cause more harm than good.
- For 6/7 people, the loans cause more good than harm.
Of course the story is more complex than that. It could be that the harm to the one guy is much larger than the benefit to the other guys. But anyway looking only at the 80% number is missing a lot of the story.
Also the statistics on default for the payday loan industry are muddy at best (its claimed to be around 6%). But, victims tend to pull out one loan to pay back another instead of "defaulting", or paying the fee/interest portion of the loan every week to keep out of default.
Sounds like loan sharks to me.
1. What would sensible regulations look like in this sector?
2. There are people who choose to not get bank accounts and do their banking at payday loan stores despite the obvious costs. If regulation drives costs up or companies out of business where would these people go?
Most of these people are not unbanked by choice. They can't afford a bank account. It sounds crazy to most of us because our bank accounts are "free" but they often have stipulations attached: minimum balances, direct deposit, x number of transactions per month. And don't forget how quickly overdraft charges can add up. People who are making minimum wage and living paycheck to paycheck simply can't afford all of the costs that come with having a bank account because it's actually cheaper for them to use a payday lender than to pay $75 in overdraft fees at the end of every month.
https://www.ozy.com/acumen/one-out-of-every-4-americans-is-u...
> In this area, the United States lags behind other developed nations. The percentage of Americans who are completely unbanked is 7 percent. For comparison, a 2014 World Bank report shows that the percentage of Canadians without a financial institution account is less than 1 percent; Germans, less than 2 percent; and Spaniards, less than 3 percent.
Some reading I've done on check-cashing and payday loans:
https://www.businessinsider.com/check-cashing-stores-good-de... (I was able to read this using reader mode in safari)
https://www.theatlantic.com/magazine/archive/2016/05/payday-...
full list here: https://pinboard.in/search/u:dwight?query=payday
> "People told me they were saving money by going to the check casher instead of the bank," Servon told Business Insider.
Also, there are banks without all that. Maybe it’s impossible to get now (because I started with ING) but my checking and savings with Capital One have no minimums, no direct deposit required, & no transaction requirements. They both actually pay interest (not much on the checking). (As far as overdrafts go they offer what amounts to a low max credit card to back the account where the interest rate is the only penalty, i.e. no fees) On the other hand, I’m sure that last one isn’t great with bad credit, and perhaps the accounts were only available to me because my credit.
Not only would an underprivileged person never have access to an overdraft line of credit as you do, they very likely wouldn't even be permitted to open the account.
Most people don't know that you actually have to be approved for a bank account. Most banks won't permit you to open an account until they've run what's called a "Bank History Report" on you. It's similar to a credit report but focused on your banking habits. For most people it's just a formality, for underprivileged people, it's serves as a complete bar to their ability to access our financial services system.
That preamble is necessary as my comments on this must be taken in context with my viewpoint on things.
I am constantly horrified by the sheer brutality and unfairness of thinly regulated capitalism in the era of globalisation. Multinational corporate capitalism truly is showing itself to be a force that, in an anti-Robin Hood fashion, takes from the poor to give to the few. Offshoring of labour has gutted the middle classes and forced the lower classes to compete with foreign populations that, starting from a much lower base, are hopelessly competitive. All that is left is service sector jobs and an impossibly high bar to cross into intellectual-work echelons.
I used to be very much in favour of globalisation but I am finding that my enthusiasm was very much misplaced. These people are reduced to debt slaves.
Some of it also is to encourage quick payback, generally the longer a high-interest runs, the more likely it will be defaulted.
Plus, many borrowers have credit / banking problems and/or their loans are too small for other lenders.
That said, it seems a field ripe for "disruption" - crowdfunding - maybe called crowdlending / crowdgranting?
That said.. you could always tax the snot out of them. If the lender had to pay a 55% tax on any money they loan out... but that would probably kill all sorts of other good loan markets, like cars and retail.
payday loans are a pretty distasteful business but you are exaggerating quite a bit. unsecured personal loans like this are almost always dischargeable in bankruptcy, unless the judge can be convinced that the borrower never intended to pay them back.
maybe I interpreted your use of "claim" more strongly than you intended, but I am mainly replying to the sentiment in this thread that payday loans create an unbreakable cycle of enslavement / indentured servitude. they are abusive loans for sure, but they're not that bad. if you already have no assets and terrible credit, you don't have much to lose by filing for chapter 7 and it will be pretty difficult for the lender to avoid having the debt discharged.
I do think you underestimate how accessible bankruptcy is for most people who are served by payday lenders.The folks I know who are forced into that market aren't well educated, and may not even know where to begin. I find that they view bankruptcy as a way "fat cats like Trump get out of the debts while working stiffs have to pay"
As a tool it's really only available to middle and upper-middle class Americans.
That is not a correct description of contract law. There are numerous other conditions that can invalidate a contract, and "usurious lending" would not particularly stand out if it was added to the list. You already can't outright sign a contract that sells yourself into slavery; it wouldn't be that big a change to prevent signing yourself into indentured servitude, even partial indentured servitude.
https://www.bbc.co.uk/news/business-44148285
I'd also love to know what percentage of people getting payday loans really understand how compound interest works and how it will impact them (for reasons of poor education, stress etc.).
Payday loans are only legal in 38 states. 12 states have already figured it out.
Essentially you have to ban compounding interest on loans without collateral, and restructure all loans with collateral as "rent on shares of the collateral" Then an "interest only payment" is renting your collateral back, and your normal payment would be buying back a share, plus paying the rent on the rest.
Islamic Banking has instantiated similar things(though I'm not familiar with all the details) and I've seen several different Christian groups propose similar things.
The financial services industry in the United States is one of the most highly regulated industries in the world and both the Federal and State governments have well-established and sweeping authority to address the problem posed by payday loans. They choose not to because their PAC donors are the payday lenders not the borrowers.