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Thought Exercise: Payday Lending

Some background on this: a couple of years ago a guy bought my truck. It was an old truck and it had been in a wreck (and was sitting in my back yard).  To get the last part of what he needed he went to a title loan place. The entire reason for buying my wrecked truck was because he had little money, but needed wheels to get to another job that he couldn't before.

I've thought about that day a lot over the years. And now Reason.tv reminds me of just how I felt when I gave him my title (to sell for ludicrous interest).

Here's the exercise: if we really do want a system that keeps the government out of everybody's business, what do you think of stuff like this? Is it acceptable to have such predatory pricing that seemingly targets "the poor"? Or is this just something that you can't talk about if you're trying to make a point about "tax cuts"?


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Comments (23)

The greater the risk, the h... (Below threshold)
GarandFan:

The greater the risk, the higher the interest charged. Go figure. While I don't condone such practices with their ridiculously high rates, IIRC the old usury laws in place to stop this kind of crap were over-ruled by the courts years ago.

Slightly O/T - but if they ... (Below threshold)
GarandFan:

Slightly O/T - but if they really want to get "irate" how about the companies with their own credit cards charging "late fees" along with interest on unpaid balances.

10 years ago I purchased an item at Sears with my Sears credit card. Came to about $24 and change. The next month I got the bill, paid it in full and mailed it back a couple of days later. BUT I forgot to allow for the Christmas holiday mail tsunami. The next month I got my bill, acknowledging payment and an added charge of $35 FOR LATE PAYMENT! The payment got there the day AFTER it was due.

I went down to the local store and asked to see the credit manager. 1st apologizing for my anger, I proceeded to chew him out. After reviewing my 20+ year credit record with Sears, he canceled the late payment. While he was doing that, I cut up my credit card and told him to mail it to the executive who thought up the 'late payment' scam. I haven't been in a Sears store since, and bad-mouth them whenever I can.

That '$35 late fee' crap has been picked up by other companies since then. Each time I got a letter from a company saying they were modifying their credit agreements and instituting the 'late fee' policy, I'd cut up the relevant credit card and mail it back with a note "Knock yourselves out - cancel my account!".

I think both the ridiculous... (Below threshold)

I think both the ridiculous interest and the $35 late fee fall under the same umbrella of "they put up with it"

Thanks for posting this Joh... (Below threshold)

Thanks for posting this John.

It's easy to see both sides of this issue, especially if you've had financial difficulties during the last couple of years. On one hand, it seems like highway robbery for payday lenders to charge the equivalent of 400% on short term loans. On the other hand, if you are just scraping by and your car (which takes you to work every day) breaks down and you need $600 to get it fixed, where do you get the money?

Instead of over-regulating the payday loan industry, the government ought to be working on promoting economic growth, thus reducing poverty and in turn, the number of people who are so cash-strapped that they are forced to take payday loans. Most Americans who are hurting financially would gladly prefer sufficient earned income instead of payday loans.

That's the proper way to put those guys out of business.

Companies that extend credi... (Below threshold)
GarandFan:

Companies that extend credit have gotten rich by not underestimating the stupidity of the American consumer. Lost track of the number of times I've seen people make minor purchases at convenience stores and gas stations (snack food, candy) with a major credit card - only to have the clerk say "Your card has been declined." The customer then reaches in his / her wallet or purse for another card. On one occasion a woman actually said "Here, TRY THIS ONE."

All I have to say is that n... (Below threshold)
ke_future:

All I have to say is that nobody is forcing people to use credit cards or pay day loan services. If somebody is using one or the other, they need to be responsible for knowing, up front, what the risks and costs are of doing so.

On the flip side, the provider of those services must be held accountable for ensuring that any rates, costs, fess must be readily and easily available, provided, and understood.

Anybody want to bet that wh... (Below threshold)
Brian The Adequate:

Anybody want to bet that when the reform dries up the current credit for the working poor because no one can make a profit at the "fair" interest levels specified by the government, the next batch of outrage will be that banks are killing the working poor by refusing to loan them money.

that's a sucker bet, brian.... (Below threshold)
ke_future:

that's a sucker bet, brian. just look at the history with the mortgage banking and Frank, Todd, Jackson, et al.

The vast majority of those ... (Below threshold)
Captain Ned Author Profile Page:

The vast majority of those who use title or payday lenders need to find themselves a small credit union where they are in the field of membership.

Small credit unions have a long history of making micro-loans like these to people with poor credit yet at rates that, while high in terms of A-paper borrowers, are an order of magnitude under the rates charged by title & payday lenders.

Are the title/payday crowd predatory? I know what my boss says, but that doesn't make it so. Their advertising & marketing walks right up to the edge of egregiously misinforming, so there is some "there" there. Besides, our usury statutes are still in place so no one can legally offer such loans here in the Peoples' Republic of VT. For the record:

Single Payment Loan: 18%
New Car Loan: 18%
Used Car Loan: 20%
Second Mortgage: 18%
Retail Installment: 18% on the first $500, then 15%

The only unregulated rates are credit cards (very few in-state issuers anyways) and first mortgage loans (Federal preemption).

I go back and forth on this... (Below threshold)
James H:

I go back and forth on this point. IMO, the really big problem with keeping government out of everyone's business, as John put it, is that in the marketplace, some people are more equal than others. And the ones who are more equal are the ones with more assets, more organization, and more oomph, and for the most part they're going to get whatever advantage they can over other players in the marketplace.

Hence you'll run into payday loans, collusion by market players, and all sorts of unsavory behaviors, esp. from companies that will unashamedly use their market power to gain every advantage possible over customers.

Ideally, I think gov't regulation smooths out at least some of those disparities. At the very least, I think it should ensure that accurate information is provided to customers, that the information is presented reasonably, and that customers have sufficient redress if they are cheated ... and that companies, in turn, have redress and have incentive not to cheat their customers.

On the flip side ... it's entirely possible for that ideal to be turned on its head, particularly when companies seek to carve out advantages for themselves in the law.

I have no good answers. All I can hope for is that people are given information that they need to make an informed decision, and that the lenders are regulated in such a way that they don't cheat customers. It's all I can hope for.

The vast majority of the pe... (Below threshold)
Clancy:

The vast majority of the people using payday load services either have no credit or have a completely busted credit history. They don't have a 'credit card' to turn too - they've already been down that road, defaulted, and this is the last stop. Well, maybe not the last stop ... Let the gov't shut down payday loan centers and 3 years from now we'll be talking about the new wave of inter-city knee-capping loan-sharks that are sweeping the nation.

Liberals really just need to stay away from business. All that math is just too complicated for someone with a degree in woman studies, or near eastern relations, or whatever bullshit do nothing degree they earned while baked out of their skulls.

Should the government requi... (Below threshold)
yetanotherjohn:

Should the government require clear language for the loans (this is the equivalent of 400% per year)? Sure. That is providing information so people can make an informed decision. But should the government say to an adult that they can't make an informed economic and otherwise legal decision because the government thinks it would be bad for you? No. If the lenders are making an outrageous profit, publish that. Someone else will say that they can do the same thing at a point or two less on interest and the market will ratchet the rates down naturally. The key is accurate and unbiased information, not the government being in charge.

If you think the government should say that the loans should be denied because they are bad for consumers, why not go all the way and make everyone send their paycheck in to the government and the government decide to send some back to you if you show you are making a wise economic decision.

On a simpler note, why should the government allow you to buy food at anything less than the lowest price. I can find a 50% difference in price between a premium brand and a store brand or a brand with a coupon discount. Why should people on the economic edge be allowed to spend their money buying food that is 50% more? It is the exact same argument.

People who are desperate en... (Below threshold)

People who are desperate enough to go to these places are the exact WRONG people to go to these places because they are crappy money-managers! I had a friend who got twisted into knots over what started out as a $100 payday loan that escalated into a judgment against her and some $550 being garnished from her paycheck! And that's minor compared to some of the many horror stories I have heard.

I'm a bankruptcy paralegal, need I say more?

>if we really do want a sys... (Below threshold)
Paul:

>if we really do want a system that keeps the government out of everybody's business, what do you think of stuff like this? Is it acceptable to have such predatory pricing that seemingly targets "the poor"? Or is this just something that you can't talk about if you're trying to make a point about "tax cuts"?


Wow... You really crushed that Red Herring with your Straw Man.

What exactly do tax cuts have to do with any of this? Oh yeah. Nothing.

These payday loan sharks an... (Below threshold)
galoob:

These payday loan sharks and their related "rent to own" appliance shops line the streets outside military bases, like Bragg Blvd in Fayetteville, NC or Little Creek Blvd in Norfolk.

There are so many thieving charges and unfair terms in these fine print contracts - like "we get to sue you in any state we want" - that it basically is stealing by fraud in a lot of cases.

Of course they have lobbyists who get Congress to do their bidding.

Payday loan companies don't... (Below threshold)
liberalNItemare:

Payday loan companies don't target the poor. Instead, they target the ignorant.

A pro-abort once said to me... (Below threshold)

A pro-abort once said to me "Don't like abortions? Then don't have one." This brilliant logic is applicable here, too, to wit: Don't like payday loan sharks? Then don't borrow money from one. Simple, no?

If everyone followed this advice, the payday loan operations would dry up and blow away.

Used to, the individual Sta... (Below threshold)
Tina:

Used to, the individual States regulated this kind of thing themselves through Anti-Usury laws, which are an ancient and legitimate means of maintaining law, order & balance in a community's lending/borrowing practices.

Texas had such laws.

Then, n 1978, the Supreme Court decided that interest rates and late fees charged by banks and credit card companies were determined by the laws of the state in which the bank was chartered, and that the state in which the bank offered loans and credit had no power to limit the interest charged.

Mind you - there are still controls on what these companies can charge, but *who* gets to exercise that control changed.

The Supreme Court at the time urged Congress to go in and fix the issue by repealing the outdated law they based their decision on. B
But Congress failed to act and has continued to fail to restore this right of self-governance to the States since.

I believe that fateful decision is a root cause of the current dismal financial situation prevalent in the US. :-(

"But Congress failed to act... (Below threshold)
GarandFan:

"But Congress failed to act and has continued to fail to restore this right of self-governance to the States since."

Careful Tina! You're beginning to sound like a member of the Tea Party!

Aw thanks GarandFan, that's... (Below threshold)
Tina:

Aw thanks GarandFan, that's the nicest thing anyone has said to me today. :-)

Predatory lending: the only... (Below threshold)
BlueNight:

Predatory lending: the only people willing to trade money for your next paycheck or car title in a crisis.

If there is abuse of the letter of the law with the poor as the target, then regulatory laws should be passed by the locality, whether state, city, county, or other in-state authority.

I had a co-worker who was trapped in the payday loan cycle. I helped him pay it off, and let him know it was because I was a Christian. If I was involved in reform, I would institute a maximum limit: five paychecks in a row, with the fifth depending on an appointment with a state Social Services counselor. Anyone not smart enough to switch to another payday loan company after the fourth would be clearly in need of Social Services.

Involving FedGov in this would only waste tax money and hurt more people.

Obviously payday lenders an... (Below threshold)
Payday Lending Rep:

Obviously payday lenders and title lenders are not one and the same, but payday lenders' pricing is not "predatory." The definition of "predatory lending" is unclear, but even when looking at the range of definitions available, payday loans do not meet the criteria of "predatory lending."

Payday loans are an affordable option for those who need quick access to emergency credit. The fee for a $100 loan is typically only $15-$17.

Want to see a great answer ... (Below threshold)

Want to see a great answer to all these questions check out www.flexwage.com. New technology that creates a better alternative to payday loans and drives value to the employers of the users.




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