Secret Network Connects Harvard Money to Payday Loans
bloomberg.com
bloomberg.com
So what's the solution to this problem? Clearly a lot of (maybe all) of the payday loan-type places are evil -- is there a way to service these customers without being evil? Would a not-for-profit (or perhaps even a not-for-an-exorbitant-profit) payday loan organization be possible? Or would the typical nasty collections process, the thousands of dollars of interest on a $500 loan still be required, even if the people at the top weren't becoming millionaires?
I guess what I'm asking is, in the story, we see someone paying something like $3900 on a $700 loan, made by one of these evil companies. What would their total bill be if the loan was made by a non-profit organization? Would it be more like $1000, or still closer to $3900?
The real problem isn't the loan itself, even if it seems exploitative: if someone is in a cash crunch, it's perfectly rational to pay something like $20 to get $200 today (that seems to be what places near me advertise, at least as introductory rates) so they can pay their rent and not be evicted. The problem is the cycle they get into where then they're $20 behind for the next one. Then they get another loan and they're $40 behind for the next one, and so on.
So you catch people that are already in the cycle, fix their immediate need (they need $200 to pay their rent), then help them figure out a way to solve the larger problem (have cash on hand in time for next month's rent) and break out of the cycle.
So the 'mission' of the shop would become to put themselves and all other payday loan shops in the area out of business due to a lack of customers.
Of course, this assumes that the root problem is a lack of planning or education about personal finance. Maybe an outsider's perspective would help. Or maybe that's completely the wrong assumptions, I don't know.
The only issue is not having something that gives you enough collateral to get the loan in the first place.
I feel like it's similar to how credit unions do what banks do, but in their customers' interest rather than the owners.
You would have a very difficult time attracting customers. Ignoring the fact that much of the payday loan industry is run by organized crime and you would likely end up with a bullet in the back of your head, even if it were totally safe you would get very little advantage from offering a lower interest rate. Studies have shown that people in economic trouble are not capable of making wise choices. It's commonly referred to as 'decision fatigue'.
I'm guessing geographical location is the biggest factor in influencing their 'choice' of payday loan shop to use, so it would be a matter of taking advantage of that decision fatigue to help them without them realizing it.
It rarely helps them and often makes their lives much worse. If they need something so desperately (food, shelter, etc), private charity or government assistance seems like a better means of providing it than payday lenders.
http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-...
Trailer with english subs: https://www.youtube.com/watch?v=OIUPWWwEclc
From IMDB [0]: "A former banker in Germany, who entered the business with the advent of modern computer systems reminisces of his working years in some of the world-leading banking corporations."
[0] http://m.youtube.com/watch?v=PDylgzybWAw
Edit: spelling
No one will touch them without charging exorbitant fees. We either stop it and let people suffer, or we allow it to continue and people at least have some ability to continue living a somewhat decent quality of life and not homeless on the streets.
For instance in NL we have the 'Gemeentelijke kredietbank' (https://www.degkb.nl/diensten/kredietverlening in dutch), a bank that operates without profit motive for those in situations as you described above.
Another option is that it's made illegal, and there are no good alternatives, so "unofficial" sources for loans are found. These can range from family members to Mafias.
Unfortunately many governments are off flogging austerity to the public while underwriting the banks and keeping interest rates near zero. So the banks can't be bothered lending and the lender of last resort becomes the payday loans companies. Meanwhile traditional banking is busy investing in the payday loans rather than directly lending itself as bank loans follow interest rates.
The USA is actually doing comparatively well in all this as it never took the austerity thing to heart as much as the Eurozone, where Germany is currently worrying about a triple-dip.
edit - as far as I can tell, the reason that the interest rates have been kept so low, at least for here in the UK, is because the house price bubble must be defended at all costs.
There is a large portion of the UK economy that will scream blue-murder if they stop getting massive year on year returns on simple ownership of housing and the Bank of England doesn't like pissing them off, which is going to be Mike Carney's job when he finally raises interest rates, shortly before jumping ship as the official scapegoat of the UK house price crash.
Obviously this is a massive guess, but it looks somewhat likely.
However our banks thrived, they profited by offering loans to major banks down in the US.
House prices are on the up and up. Me and my wife bought just before they tightened up mortgage regulations here, since then house prices in our area have been going up by about 13% per year as banks were no longer issuing mortgages for Toronto house prices ($500k and up) as the down payment required doubled and they increased the threshold on the default insurance (you need about 15% down to get the same rate you used to at 5% down).
However, the banks were being so risk averse in the recession I couldn't even get approved for a $500 credit card. I'm from the UK, so with no credit history I was an untouchable. A couple years earlier my wife with essentially negative income as a student had been handed cards left, right and centre.
There is a dark iceberg under the consumer Internet. Online pharmacies. Rebill scams. "Government grant" applications. High interest loans. Educational institutions of dubious utility (disclaimer: took one's shilling once, indirectly, and regret it a bit). Spam, scams, and the like, on a massive scale.
There is a UI for AdSense publishers where some Google PM made the decision "If we give them options to tart up their website less, let's tell them how much money it costs."
http://bits.blogs.nytimes.com/2011/08/24/google-reaches-500-...
I certainly can't list all of the companies I have investments in, and I bet most people can't either, other than to say they have a mix of mutual/index funds.
I applaud you for your principled stance but you should be aware of all the consequences.
(Another term for this is "socially responsible investing" and there are indexes, and associated high-fee funds, that claim to seek it. However, I feel this is a very personal issue; I wouldn't use such an index because someone's definition of socially responsible/non-evil may be very different from mine. My opinion is such indexes/funds are just gimmicks with high expense ratios.)
And even if such an approach will most likely lead to lower returns (for example, due to higher fees in paying commissions, though that can be reduced or eliminated by smartly taking advantage of brokerage promos), I'm fine with that. I'll take my $1.00 earned from what I consider to be ethical means vs. $10.00 earned from what I consider to be unethical means.
You say that, but 0.0000000000000001% of even the world's largest company by market cap (Apple, at 592.44B) would be $0.000000560337
if you ever so much as glance at an ad an evil company runs, then assuming a CPM of $0.01 (two orders of magnitude lower than actual average cost), your single glance is worth $0.00001 or 17 times the value you said you would never hold.
So you'd never hold $0.0000000000000001% of an evil company but you are more than happy to just give them 17 times that value for free by glancing at one of their ads at some point in your life?
You need to lower your purity standards if you don't want to be a hypocrite :)
EDIT: all right, I mixed my metaphor. just think of an evil ad company :)
But yeah, the 0.xxx1% percentage was just exaggeration :P
http://www.lendingkarma.com/content/state-usury-laws-legal-i...
It says some horrible things about me that what I found most interesting was the demeanor of Zeke Faux. I have rarely ever seen someone so visibly uncomfortable in front of the camera. It was kind of amazing.