Ray Fishman writes a thought provoking article in Slate Magazine about the psychology of payday loans titled “400 Percent APR—Is That Good?“
What I like about the article is that it approaches payday loan abuse from the correct angle. Basically, he says that most people using payday loans do not understand the true cost of the transaction and the the APR actually is not a good metric.
I know this isn’t going to be popular, but I want to see this industry continue. Quoting a payday loan as a daily rate $2.35 per day, is a bad idea. Trying to make an expensive product look inexpensive is why most people turn off when the industry talks.
Payday loans are expensive because many people do not pay. The people that pay have to cover the losses for the people that don’t pay. This is why 36% does not work. Every lender would go out of business.
Legislators, instead of limiting rollovers, should demand another, more practical, method of disclosure. Create an schedule for a loan that is rolled over 3 times and show the nominal cost of the loan.
Anyone that’s been successful in this industry knows that if the borrower needs the money, they’re going to take it. Maybe this type of disclosure could be used to build credibility for the industry.
As far as I’m concerned, providing clearer disclosure will win over the people that are on the fence with payday loans. That’s what the payday lending side needs to do. Get people that don’t care, to care; and be on our side.
