Are PayDay lenders better than banks? #OWS
Sometimes my plan of getting up super early to write on my blog fails, and this is one of those days. But I’m still going to ask you to read this article from the New Yorker written by Lisa Servon and entitled, “The High Cost, For The Poor, Of Using A Bank.” Here’s a key passage, but the whole thing is amazing, and yes, I’ve invited her to my Occupy group already:
To understand why, consider loans of small amounts. People criticize payday loans for their high annual percentage rates (APR), which range from three hundred per cent to six hundred per cent. Payday lenders argue that APR is the wrong measure: the loans, they say, are designed to be repaid in as little as two weeks. Consumer advocates counter that borrowers typically take out nine of these loans each year, and end up indebted for more than half of each year.
But what alternative do low-income borrowers have? Banks have retreated from small-dollar credit, and many payday borrowers do not qualify anyway. It happens that banks offer a de-facto short-term, high-interest loan. It’s called an overdraft fee. An overdraft is essentially a short-term loan, and if it had a repayment period of seven days, the APR for a typical incident would be over five thousand per cent.
It makes me wonder whether, if someone did a careful analysis with all-in costs including time and travel, whether PayDay Lenders are not actually a totally rational choice for the poor.
mathbabe 
I talked to someone who works for a PayDay loan company, and he said that the amount of demand is phenomenal. Many people can’t thank them enough, saying they couldn’t make it without them. Although the rates/fees are high, it’s hard to undercut, because the loans are so short-term, and the risk of non-payment and fraud is so high. I am sure the rates are still inflated some because the business has such bad name and so much regulation that there isn’t as much competition to offer better rates as there could be.
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Payday loans come in many different forms. There’s a wide spectrum. It’s hard to believe that the more abusive loans could be rational.
Here’s a $50 loan, repayable in 24 semi-monthly payments of $24.50. How can this make sense for anyone? s3.amazonaws.com/s3.documentcloud.org/documents/737804/cash-loans-now-loan.pdf
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I would hesitate to call even the less abusive payday loans rational. There are few circumstances where they truly help the borrower. Much more commonly they stave off a crisis only to create a worse one not far down the road.
Rather can “payday lenders better than banks” it should read “could banks be even worse than payday lenders”.
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I talked to someone who works for a PayDay loan company, and he said that the amount of demand is phenomenal. Many people can’t thank them enough, saying they couldn’t make it without them (e.g. many people rely on them in August for school supplies and holiday season for gifts). Although the rates/fees are high, it’s hard to undercut (which, to me, is the best indication of whether it’s abusive) — the reason is that the loans are so short-term, and the risk of non-payment and fraud is high.
I am sure the rates are still inflated some because the business has such bad name and so much regulation that there is limited competition to offer better rates.
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There was an article
on Atlantic Cities on check cashers, which is a closely related business.
Todd Zywicki is also a student of that and related question.
Just looking at the charges as banks and retailers post them, I have a hard time seeing why anyone without a substantial amount of cash would have a bank account. Deposit a check that bounces ($35), and hence overdraw your account ($35) and have a check bounce ($50)–you can pay for an awful lot of check cashing for that.
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The NYTimes had an article on payday loans a while back. Not only are they often cheaper and more accessible than bank loans, but they are more predictable. A number of the people interviewed for the article pointed out that when dealing with a bank, you never know when you are going to hit a speed bump and get ripped off with a five dollar fee here or a fifty dollar fee there. Having a bank account is like navigating a mine field, and the terms of having one are subject to change by the bank at their whim and with no notice. Payday lenders tend to have simple to understand charges without lots of got-yas. If they charge $5 to cash a check or $3 for a money order, odds are that those fees are what you pay. There is no account maintenance fee or inactivity fee or the like. Even the overpriced loans are more likely to have predictable costs than if one dealt with a bank.
In other words, our financial sector has become increasingly inefficient, increasingly in need of large government subsidies and increasingly useless. We really made a mistake with the bailout. We could have built a new system that was ten times as efficient and a lot more useful.
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That’s a very interesting angle–do you have a link or date cite to the article?
FoW
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That banks come out to be more expensive with overdraft charges is correct, but the analogy is not quite accurate. For a poor person, an overdraft fee is charged but the check is typically returned, not paid. I don’t know the formula used to determine when to actually pay the overdraft amount for the bank customer, but it is not automatic. It is either a feature of the account or allowed by virtue of some attribute of the ongoing account status. Banks don’t risk money they don’t have to. At one bank I used, they actually created an open policy where getting overdrafts paid up to a certain amount of your average balance was guaranteed. It required an opt-in and an annual charge.
PayDay loans in some areas are nothing more than a surcharge on life. A person’s spending versus earnings is moved forward by two weeks and they are thus charged an effective annual interest rate equal to the charge divided by the paycheck (as it applies to virtually every paycheck). The article asserts that it happens on average 9 times a year, but I would want to know the source and methods for that data. I’ve also encountered numerous articles and interviews on the fact that high risk borrowers are a gold mine. Of course the formulae differ depending on the exact circumstances of the high risk borrower, but it does work as a business model, even if it’s corruptive as a social model.
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The online method of application is easy and borrower is
not required to provide any documents for the approval.
Should you have to get a payday loan, make certain you do not roll it around too numerous occasions – which is when it becomes a dilemma.
Each month, you likely wish you could pay off the balance, and avoid the accumulating interest on the cards, but the
total payoff is not in your budget, and you just continue
to go deeper and deeper into debt each month.
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