Broke USA Tells Payday Loan Stories from the Ground Up

Those interested in the dark crevices of consumer lending might want to go to the library or book store and pick up Gary Rivlin’s new book Broke, USA, or at least read this article about it. I just had a spirited discussion with some lenders’ attorneys about payday lending and they insisted that I not worry so much about 500% APRs but instead focus on the high cost of making these loans. In other words, as the argument goes, profits are not that high so the rates are necessary.

Rivlin’s book highlights one thing you might not know, namely that lenders work very hard to get people into these loans and keep them there. Rivlin notes that “every chain I came across offered $20 off your next payday loan if you brought a friend, family member, or co-worker…Then there’s the upsell. A customer comes in and asks for $200 but could qualify for $500. The store managers were instructed to point out no less than three times that they could qualify for $500.”

In my own recent curbside interviews of payday lending customers, I have seen a customer loyalty card, where as long as a customer does not pay down any of the principal on the loan, they can pay the fee four times and get the fifth fee free. What a deal! Plus, if you do pay down any principal, some lenders call you on the way home to offer more money again. This hard-sell practice is highly relevant to one of the most oft-used industry arguments against quoting rates in annual terms, namely that these are short-term loans. The lenders try to make the loans long term ones, even if the customer wants out.

One last side-note in passing, consumers in Nevada need to be extra careful these days. They are a barraged not just with payday lenders but also with those pretending to be collecting for payday lenders. Check out that story here.

Comments

[Leonard Britt]

What is the APR on a late payment fee of $100 for paying on the fourth day of the month at my aparment complex (plus you get an eviction notice)? How about the $3 late charge for a utility bill because for some reason it got lost in the mail (thanks to the US postal service)? What about the ATM withdrawal fees for using another bank's ATM? Or NSF fees at banks? The only reason the payday loan industry exists is because it is cheaper and more convenient to take out a payday loan than get hit with NSF fees or late payment fees from other service providers which can also discontinue a necessary service.

[Vortigern]

The hard sell is a sign of low profitability, not high. It's like faculty senate arguments: they're so vitriolic because the stakes are so low.

[mt]

"I just had a spirited discussion with some lenders’ attorneys about payday lending and they insisted that I not worry so much about 500% APRs but instead focus on the high cost of making these loans. In other words, as the argument goes, profits are not that high so the rates are necessary."

I am curious what your response was. Do you have a different analysis of the lenders' profits and losses? Or are you indifferent to that side of the transaction and just focus on the borrowers' side (I infer the latter from the way your post proceeds)?

As you may have noticed from earlier comments, I am a proponent of consumer usury laws and less consumer credit generally, so endorse the latter view but intellectually it is proper to comprehend and frame the issues completely.

[Nathalie Martin]

Thanks for commenting!

To mt, I have less interest in the profits issue than in whether these loans are necessary for most of the people who take them out. For example, do people have lower cost options that they would use if these were less available and easy? To me, these questions make the profits issue less important. I question making credit this available (almost every corner in New Mexico) and this easy, and with high presure sales tactics, regrdless of the profit or lack thereof for lenders.

I am also fascinated by the capacity and desire of the industry to keep people in this type of debt, when at least some in this industry claim the credit is used for emergencies only, sparingly, and not continuously.

They also say they are there to help. Do they help? I bet they do soemtimes, but to you very valid point Mr. Britt, I wonder what happens if a person is unable to pay off the payday loan after one fee, and next month both the loan fee and the rent are due.

[Ebenezer Scrooge]

I can't understand the focus on profits. Maybe the child porn business is ultracompetitive and has low profits. That means we should tolerate it?

Whatever the profitability of payday lending, it messes up peoples' lives and gives them very little, if any benefit. 'Nuff said.

[mt]

Thanks for replying. I find these loans distasteful but for a very different reason. Before stating that, I believe the profits issue is relevant to your question whether the borrowers could obtain this credit more cheaply - if the profits are slim, which I tend to think they are, due to skips and bankruptcies and other defaults, then it's likely the borrowers are not consistently going to get such credit more cheaply; the profits won't be there.

I do share your aversion to the tactics and the population they are employed against. But I think one has to be very rigorous in not imposing one's taste on other adults coercively.

Rather, I object to a credit business, this kind or credit cards generally, where defaults are so high that the more responsible borrowers subsidize the lender for the less responsible. I understand that happens to some extent in any lending business but I want the proportion to be as small as possible because otherwise the lender has an incentive to be lazy and, as a meritocrat I want a system where the lenders have to judge credit astutely to make money and borrowers have to present good credit profiles to go into debt in the first place, and virtually all of them pay the loans back so that overall interest rates are as low as possible.

[Nathalie Martin]

Now I am curious. I heard that the default rate on these is lower than with many other forms of consumer credit. Does anyone have a reliable source on this issue? Also, the alternatives I am talking about include not taking out a loan.

[Jim Hawkins]

I was looking at a public payday lender's annual report the other day, and it reported bad debt, so I think it might have enough data to make a good guess about default rates.

[Jim Hawkins]

I thought Rivlin's discussion of profit was odd. He seemed really upset that some payday lenders made 11% profit rates, which is somewhere in the middle of profit rates for publicly held companies. In the middle seems reasonable to me...it certainly does not seem excessive, unless 50% of public companies are currently making excessive profits. That said, I agree with everyone that profitability is not a good test for credit products.

[Nathalie Martin]

thanks Jim for those comments, and good idea about looking at public co. data. I am looking at QC Holdings right now...on first glance, it looks like they are reporting 2-5% defaults in general, and 4.1% for this reporting period.

[Sabastian Miller]

The fee charged for a payday loan is equivalent to a 250-650% Annual Percentage Rate (APR), which is by far one of the most expensive loan options on the market.