Category: rant

  • Why the media tells half truths about payday loans

    I was reading this article. It had all the elements of a sensational story. The little old lady, during the holiday season and the $1700 balance on the $600 advanced.

    She leaves a great sound bite: “When I got these papers in my hand and got to looking at them, I thought, I’m being stolen blind.”

    The article left out some critical information. This is a simple interest loan and you can pay off at anytime without incurring a prepayment penalty. It this loan is paid in 14 days, for $600, this loan will accrue about $3 per day. So if they pay it off the next time they get paid, they’ll pay at most $50. If she borrowed $300, it would be more like $25. An NSF fee is more than that.

    Notice her son paid the loan, but they don’t say how much was actually paid. The news only wants you to see $1700 on $600. It’s like saying your $300,000 home (at 7% interest) is going to cost you $718,000 over 30 years. It’s accurate, but does not tell the whole story. With this logic, they would make mortgages illegal.

    I used this consumer loan calculator to play around for the numbers. I think the lender’s math is wrong. A $600/12-month loan would cost $1536.66 and carry a monthly payment of $129.14.

    I’m glad that 81 year-old Mattie Anderson looked at the contract and understood the transaction. By law, that’s what’s important.

    The payday loan industry needs to be upfront and honest. What the general public does not realize is that lenders turn away a lot of borrowers. This means that there is a market at work here.

    The point is not to prove to the general public that they should take out a payday loan, rather to get them to accept the need for this type of a product and not condemn it.

  • Everyone is blaming payday loans

    “Payday loan customers who are approved on their first application are more
    likely to file for bankruptcy than those whose initial applications are denied,
    according to a study out of Vanderbilt Law School.”

    This article title “Payday loans create bankruptcy danger” places an interesting spin on things. What it proves is that payday lenders will just not give a loan to anybody.

    I also believe that this finding is purely incidental. Most of these people would have filed bankruptcy anyway b/c of the combination of credit cards and negative savings.

    To further discredit this study, many people do not have enough debt to file for bankruptcy. People who are denied a payday loan sometimes do not make enough money to qualify.

    Bankruptcy has 100% to do with personal responsibility and not payday loans. If you want to blame payday loans you should also blame: consumerism, credit cards, low wages and my dog.

    The problem today is that it’s part of the credit system and the intellectuals of the world just want to point the finger and scapegoat this community.

  • Opinion on capping rates at 36%

    The Progress Illinois blog wrote a very thorough article on the current landscape of the sub-sub prime lending in Illinois. Below is the comment I left on their site.

    Here is the biggest problem in the industry. The people that pay have to pay for the people that don’t pay. There’s always two sides to a story. Here is the other side: the people that pay back a loan are paying for the people that don’t pay back their loan. Probably close to half the people that take out a payday loan, don’t make a single scheduled payment.

    If everyone paid back their loan, you could make the interest rate 7% and everyone could still make money.

    By capping the rate at 36%, you’re just locking people out of the system. If people think that locking these people out of the system is the best interest of everyone, then they can cap the rates. But, why stop there, let’s look at a few other examples like credit cards and mortgages. How about only people with 700 or greater credit scores should be able to have credit cards and/or get a mortgage in this country. Then we wouldn’t have the mortgage crisis and fewer people would be filing bankruptcy.

    By capping the interest rates for the payday loan product, you’re just forcing these people to go on a “financial diet”. The big pink elephant in the room is that if you cap the rates at 36%, what percentage of the people can borrow money at 36%. My guess would be around 10% and they would get a huge lecture from the lender, first.

    If they made a public record of credit scores and the people that use payday loans, they would realize that this customer can’t be lent to for under 36%.

    My opinion is that if you’re using credit to pay for an expense, it doesn’t matter if you’re paying 5% or 500%, it’s not a good financial move. Paying 5% interest for an expense is silly and paying 500% interest is just stupid. You’re telling me that we need a law, in this country, for people to understand this concept? The consumer groups will say, they don’t know what their doing because they’re desperate. We are talking about adults that have the right to vote, right?

    If you cap the rates at 36%, most of the lenders will close their doors and people will go to the internet and get a loan from an offshore company where they don’t even pay federal or state taxes. The people in the middle class and the consumer activist groups will sit down and think they made the world a better place, while the lower middle class will get doors slammed in their face by banks, friends and families because they needed $300 yesterday. Maybe this is a good thing.

    The worst thing you can do is let people off the hook. Regulate the industry and when people come to you and say, I can’t pay this loan back, don’t tell them it’s not their fault because it is. If they didn’t take out the loan, they wouldn’t be in this mess. They’ll ask their friends opinion about their car, their shoes and their new haircut; but when they walk into a payday loan store, they don’t ask anyone’s opinion because they know they’re wrong and no one is holding a gun to their head. So, tell them that it is their fault and that they’re harming themselves and that they shouldn’t borrow money to pay their bills. Finally, tell them not to take out another loan. What ever happened to personal responsibility?

    What the consumer groups and people that care should focus on is how to move the people who do pay and are responsible “up the credit elevator” so that they can get a loan for double digits, instead of triple digits. In the end, this will do more to help people then locking them out of the system. If you cap the rates at 36% this group of borrowers will never move “up the credit elevator.”

    As far as the term “unconscionable”, the sad reality is that this is relative. To the lower, working middle class, these rates are their reality. That’s what free markets is about. There is a wide spectrum. The people that want payday loans to go away, typically don’t use the product. They’re just using their own moral superiority to make these judgements for the people that use it

    Anyone, regardless of interest rate probably wishes they didn’t get the loan after they spent the money and can’t pay it back.

  • Ohioans for Financial Freedom Commercial

    You can view it here. I think the commercial make a point, but it’s not very ernest. Forget the commercial for a second and let’s hear what people had to say. It’s near the bottom of this link.

    I’m sick of hearing people correlate the mortgage crisis with payday loans. It’s imflamatory and doesn’t even make sense, if you knew anything about the payday loan industry. People really need to be honest about this subject. People over-paid for their homes and got easy credit. Now they want to bail these people out, although they forced housing prices up for good credit borrowers. Thanks for rewarding fiscally responsible people.

    I tell people that they should not take out a payday loan, just like I tell them to pay off their credit cards each month. How do you educate people if you pull their feet out of the fire everytime because you feel sorry for them.

    Here are the comment I liked:

    Posted by jmacleve on 08/12/08 at 8:30AM
    “I do agree with the part about choice (and what jaquick said). You don’t want to use a payday lender? Don’t. But stop telling other people how to run their lives.
    Yeah, people pay extra for these loans. But I see more money going over the counter for lottery by people who probably can’t afford it than any payday loan. Why aren’t you patronizing types lobbying to end the lottery? After all, it feeds on a lot of the same people!”