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Comment by exabrial | Hacker News Reader

* Payday lenders charge fees that automatically incur interest. There's usually a fixed application fee, and there's a penalty for paying off early. Both of these are designed to reduce the amount going out the door while increasing the principal.

* 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.

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> * Selling their debt is quite profitable for payday lenders, so they are incentivized to make bad loans.

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.

There's nothing inherently wrong with the structure of a single payday loan. Ultimately it's a fee for a service. It sucks to need one, but sometimes you need to take your lumps.

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.

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