If a loan is so risky that it requires greater than 36% interest, it should not be made. Loans with gigantic interest ruin lives.
Borrowing $500 for one month and paying $15 in interest would be completely worth it and beneficial to the borrower. That's what 36% annualized interest would look like for a single month.
Do people get in trouble with debt? Yes. And that's why we have bankruptcy. But not everyone gets in trouble with debt. I don't think it's fair to make it unavailable to everyone to protect those that fall into arrears -- because, again, that's what bankruptcy is for.
Well, that's your problem right there. Unless you have routine access to spending opportunities that yield more than 36% in yearly returns, which I'm going to assume is pretty unlikely.
What you do is you starve a day or two and sell your food bank food. Everyone is capable of generating income while depleting from stores.
Of course the real problem is many jobs don't pay enough.
In fact not getting paid enough - and therefore being unable to budget - is considered evidence of poor character, while not paying enough is considered evidence of enlightened and mature rationality.
It's quite a strange view of the world.
so you'd be in favor of payday loans if they were limited to n times per year?
>If you haven't been able to save $100 a month for five months, you just won't be able to save five times as much, let's be realistic.
what about people who have the free cash flow, but can't save for various reasons? eg. friends/family asking for money, poor self control, etc.?
Unbounded APR and "letting the market figure it out" is not the solution.
BTW, right now US treasury bonds have a higher 10y yield than Italy.
Sure, we could find each of these risky situations and try to regulate them, but you won't even know of them because most people will never get towed. It's better to improve access to credit.
The guy could get $100 the next day, but not $100+storage-fee/day. It's like $70/day. Any loan that goes between 0% per day and 70% per day simple interest would have been a net win for this guy.
Obviously, having eavesdropped on the whole thing, I paid it as I was leaving but I think perhaps those of us with easy cash liquidity should perhaps build some intuition on what kinds of situations cause people to take on onerous credit.
EDIT: Oh, I recalled a detail I'd forgotten when first relating the tale. He wanted to go get his phone from the van so he could call for help but they wouldn't let you in the yard without paying to release. I imagine he was going to have a damned hard time asking for help without the phone.
"The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness."
I went through my fair share of Walmart black no slip shoes before moving into tech. I hope financial hardship is in your future as well as your past. Maybe you'll figure it out the second time around.
Wow.. I had to check your post history to make sure I didn’t misinterpret your words. There was a clear pattern. You seem smart, maybe you can find it too.
My dear internet stranger and fellow HNer: I hope you find more love in your life and the ability to see it in, and give it to others. All the best to you!
Would'nt it be better to rack up a $500 loan and then try to pay $100 per month so that it can be paid off in 6-9 months - even with 36% interest ?
Don't most metro areas have public transit? Perhaps buses are not the most comfortable or convenient, but they do exist, and for good reason.
Actual democracy is an extreme negative, not a positive approach to organizing society.
You can claim the majority would benefit from eating the wealth of Sergey Brin and Larry Page at this point, they no longer operate Google, they're just ~50 year olds sitting on $200 billion in Google shares, piddling around until the day they die. So why not let society benefit sooner rather than later by consuming their wealth to its (supposed) benefit, divvy up their wealth to the poorest 51%.
You can invent a huge number of scenarios for doing things like that, where society supposedly is better off if we violate the property rights of some minority group. Why shouldn't some minority of people be allowed to lend at 43% interest if there are takers at that rate? Because you say so? Why shouldn't their property rights be respected - the property right to lend their money out at the rates they can command - and why should the majority get to arbitrarily restrict their property rights? It sets up an obvious exploitation situation, which is always the case in democracy, where the majority can endlessly torture, exploit and abuse the minority.
It would very clearly be better for the top 51% (far more than that actually) - the majority of society - if the economic bottom 10% did not exist (a group that rarely holds a job, has vast health & drug addiction problems, rarely pays taxes into the system, rarely contributes much of anything; and in fact that's true in nearly all welfare states, including the US). So they should all be gotten rid of, is that right? Democracy in action. The tax paying majority is sick and tired of carrying the never-tax-paying economic segments at the bottom, time to get rid of them, for the benefit of "society" (aka the majority power herd).
https://www.pewtrusts.org/~/media/legacy/uploadedfiles/pcs_a...
Those seem like damn good odds for something that is necessarily a zero sum.
I would expect that as you get lower down (say bottom 10) it becomes even more volatile since the wealth needed to get out gets even lower.
For the same reasons we have regulations and standards in construction, transportation, etc. Because we know that uninspected cars will leads to death and injury on the roads. So laws and regulations are there to reduce selling and using blatantly unsafe vehicles.
And they happily drive off the lot with a $80k car loan at 36%. People are, pardon my french, dumb as shit when it comes to car purchases. They are very happy to lose a guaranteed $10k/year in deprecation, so they won't get hit by a $2000 surprise bill.
While I was a student over the span of 5 years I had spent to the mechanic more than what I had paid the dealer for my 10 yo used car. Without the help of my parents I am not sure how I would be able to spit enough money to pay all of these bills.
So yes paying 400 per month for 7 years with high interest is a better deal that getting a car that you can afford with cash.
Playing the devil's advocate here...loans with interest rates higher than 36% are generally reserved for subprime lending - payday loans being the most prominent. As long as we live in a society (talking US here) where minimum wages don't keep up with inflation and benefits, then these products in some sense need to exist to satisfy that subprime group. Otherwise it's literally impossible to create a profit on payday loans if these rates are much lower.
Note - I don't know what the "right APR" is to make them profitable, but I certainly can fathom why there might be a 1000% interest rate on a 7 day loan of $100 so someone can get their car out of the pound so they can drive to work. The administrative overhead to lend $100 and only make pennies is simply not worth it.
Also, yes gigantic interest rates ruin lives...more importantly predatory sales practices to get people to buy them. But maybe we should focus on why so many Americans get to that in the first place (looking at your healthcare) - thats a much easier market creation.
Some people make good use of these, as timely sources of money when there's not a lot of other options (not everyone has credit or saving or friends and family that can help). At the same time, it is extremely predatory, and the lenders are constantly trying to maximize the money they can get from people (such as rolling a new loan into the payment of the original, meaning only the interest is functionally required on the due date, and they get to skirt the laws of the loan required to be short term).
It's one of those catch-22 situations where doing away with the market entirely hurts those you're trying to protect, but it's hard to regulate effectively because the benefit is it's quick and short, meaning too many hurdles might be the same effectively as doing away with them completely.
That's a very narrow definition of capitalism. It's not just 'stuff' that is privately held, it is also the means to generate profit and a very large chunk of the available capital. The effects of that go way beyond just 'stuff', and can make it next to impossible for someone born at the bottom of the stack to work their way up. Of course, some inevitably succeed at this and they are held up with great fanfare to prove that 'the system works' but on average, if you are born at the bottom your life will likely continue to at that level of society without much chance of upward mobility because the system is stacked against you.
And payday loans at exorbitant rates are a mechanism that keeps people down.
Perhaps the most realistic definition.
You could also restate it as "most people don't have lots of money"
Regardless of how much you yourself actually have at the time.
I think it's good to look at "capital" as "other people's money" (OPM).
Of course if you have enough of your own you might not really need any of OPM if you don't want to get involved.
OTOH in that case you might be one lending out some of your own "underutilized" money to others who are "interested" in OPM of some sort.
The repayment includes the interest intended to compensate for the risk & delay in repayment, so it simply means more of OPM is coming back than yours that went out.
If none of this OPM was changing hands there would still be the same amount of capital.
But the capital-ism where the system is structured so financial rewards of labor are subjugated to the financial rewards of capital itself according to its magnitude would not be as much of an actual thing.
And it's this feature that can be exploited by greed in the most disadvantageous way compared to less OPM-oriented financial foundations. Regardless of the mathematically enhanced returns to the most shrewd capitalists, the greed itself subtracts from what actually could have been overall.
As the magnitude of the money that most people don't have a lot of, becomes less significant compared to the some people who have lots of money, the unlevel playing field tends to tilt toward the vertical as a function of greed.
[0] https://www.cambridge.org/core/journals/perspectives-on-poli...
"Communist" China is a lot better if you're rich. So is "socialist" Europe. So is "capitalist" America.
The -isms have never really mattered.
The golden rule truly is "whoever has the gold makes the rules".
No, it's private ownership and trade of stuff. That seems nitpicky, until you contrast it with other economic systems, in which case trade is strictly regulated, and it becomes obvious that's a large part of it.
> the generations of economic nuance we have developed
You mean the nuance that takes us further from a pure capitalistic and free market system into a hybrid system where there are regulations and communal (government) efforts to counteract the portions of capitalism and free markets that are not palatable for a modern society because they fail to lead to outcomes we want?
There are reasons why the poor of today are better off of the poor of a century ago, and many of those reasons are not much in line with capitalism and the free market, while others are. Minimum wage, regulations on predatory practices, etc account for a lot of that, while advancements in technology and medicine much of the rest.
Without regulations, which are a restriction on private trade, we'd still be dealing with the things Upton Sinclair chronicled so long ago (whether embellished or not).
In the UK, the consumer finance regulator the FCA did an in depth analysis of subprime lending and concluded that "fair" maximum charges were interest rates of 0.8% per day and total costs (interest, fees and penalties) no more than the amount of the loan principal borrowed.
source?
>and concluded that "fair" maximum charges were interest rates of 0.8% per day
"fair" in this case being what? The interest rate being enough to offset defaults? Or enough to offset defaults + overhead + profit?
>and total costs (interest, fees and penalties) no more than the amount of the loan principal borrowed.
I find this baffling. 0.8% per day compounded for a year is 18.3%, but they say that total costs can be equal to the principal? That means the effective APR can be up to 100% (if borrowing for a year), more than 5x the "fair" APR from before. Speaking of which, why isn't the length of the loan factored in? Surely a 1 week loan should have a lower "total cost" than a one year loan?
From this post:
Martin Wheatley, the FCA's chief executive officer, said:
'I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers.
'For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.'
So who in their right mind would provide such a service if there was no path to a profit? /headscratch
I just don’t have that kind of liquidity.
I can turn the required savings/stock in to cash with 3-5 days of lag. But not the same day.
This is where a subprime loan would be useful as a bridge, and in that situation I don’t think it would ruin my life.
Consumers know what’s best for them. As long as the APR is accurately advertised, I don’t see why people should be jammed up because some people think interest is a sin.
>Consumers know what’s best for them.
Yeah that didn't work out the last time
Margin has a bad name as a "high risk" activity, but that's mostly when you have a concentrated position and are taking out a margin loan to double down on that concentrated position. Using margin as a bridge cash loan for a few days is a fairly low-risk proposition.
The rest of the world would prefer you not to crash the world economy like it happened in 2008, for the sake of a clueless aphorism.
If someone is NOT acting in their own best interest, then there are an infinite number of things that need to be removed from their options.
Just because it looks scary to you, people go to these kinds of tools because they need them. When those tools are taken away, they will go down riskier paths, or fail to pay bills (which can lead to worse outcomes). Don't treat everyone like they can't think for themselves and understand what they are getting into. Sometimes solutions like these are needed.
This is some sort of fallacy, but I don't know the name of it.
Anyway, as a counter point, I'm here from an alternative reality where we instead instituted this law limiting APR a year before google started. Google still managed to buy servers despite the law (I think that story's apocryphal, but even if it's true, they just got them at lower interest rates or got like 2 fewer servers and google was slower for a few months).
However, in this alternate future, there's also another company that did a lot of really good things founded by someone who in this reality ended up the victim of a payday loan, penniless, and is still struggling with the after effects of declaring personal bankruptcy. His even-better-company didn't happen.
Do you sorta see what I'm trying to say here?
Maybe the fallacy is just a bias towards some specific vaguely related anecdotes over data? The sorta "I agree in general drunk driving is bad, but doesn't Steve Ballmer actually drives better while drunk so maybe it's too broad of a brush to outlaw it?"
Edit: also it seems like the fallacy would be in the other direction. Up through the Middle Ages, charging any interest at all was “usury”, because no one saw the difference between “non-exploitive business loans” vs preying on the desperate; the former was the bizarre special case, until the exception became the rule.
Playing devil's advocate: it depends. When I was younger, there were times when, if you lent money at only 36% per month interest, you'd be losing money. You'd have to lend at rates higher than that, just to break even, no matter how low the risk was.
1. Pay the loan on-time (more than 90%; Community Financial Services Association of America, "About the Payday Industry: Myth vs. Reality.")
2. Do not roll over the loan (same source)
3. Are able, in advance, to accurately predict when they will be able to pay off the loan ( https://scholarship.law.columbia.edu/faculty_scholarship/594... )
4. Report having been satisfied with the experience as a whole ( http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.554... )
Furthermore, evidence shows that, on the whole, loans of this nature prevent bankruptcy, foreclosure, bounced checks, and other outcomes ranging from extremely devastating to merely disruptive ( https://www.researchgate.net/publication/5051409_Payday_Holi... ; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344397 ; https://digitalcommons.chapman.edu/economics_articles/104/ ).
I think fortunately/unfortunately, most HN readers won't be familiar with the benefits quick, easy access to capital can have for a person, especially those living on the margins of poverty, where missing one e.g. auto or phone payment can have cascading, long-lasting effects, such as losing a job. The nice thing about our distributed, relatively free-market economy though is that every person can act as an independent agent, analyze their own risk tolerance and ability to make responsible use of the financial products available to them, and make choices leveraging personal information that no centralized authority (or blanket rule, such as "loans with interest above 36% should not be permissible in any circumstance") could possibly have access to.
There's a time and place for everything and that probably includes high interest loans as well.