Posted on 04/14/2009 4:14:35 AM PDT by Scanian
For those who depend on taking out a loan in advance of a paycheck, life may soon get harder if Congress passes the Payday Loan Reform Act.
The bill's sponsors, which include Rep. Luis Gutierrez (D., Ill.), say they want to clean up abuse in credit markets by clamping down on the prices lenders charge for payday loans. In reality, the legislation will reduce the supply of these loans and make borrowing more expensive.
The reform is based on the false premise that consumers take out these loans without realizing how much they are paying. True enough, these loans are expensive. A two-week payday advance of $300 typically comes with a $45 finance charge -- an implied annual percentage rate (APR) of 391%. Critics say borrows could not possibly intend to pay that much for an advance on their paychecks, and that the cost alone is evidence of exploitation of the working poor.
But new research suggests that most payday borrowers are more rational and informed than critics believe. A January 2009 study by Gregory Elliehausen at George Washington University found that payday borrowers make informed choices. About half of the 1,173 payday borrowers he surveyed considered other credit alternatives -- such as bank, credit card, or personal loans -- before taking out a payday loan. Over 80% lacked sufficient funds in their bank accounts to meet their expenses, so by taking out a payday loan they avoided expensive checking account overdraft fees. Nearly 90% said they were either very or somewhat satisfied with the transaction.
A November 2008 FDIC report on overdraft protection provides the context. According to this exhaustive study, the average APR on a two-week checking account overdraft is 1,067%, more than double the rate on the typical payday loan.
(Excerpt) Read more at online.wsj.com ...
Now this I am happy about...My Sailors are constantly getting themselves into financial messes due to these rip off places.....I can feel the blasts coming...lol.
I agree with you. This is nothing more than legalized-loan-sharking. Furthermore they actually discourage paying off the loans.
This is great news. Like you both I am constantly counseling my troops on how this is a bad idea. I once had a troop owe $4500.00 to a few of these places. They a legalized loan sharks. In fact it’s gotten so bad we’re pulling clearances due to money problems. But on the other hand my troops need to learn the value of saving up for a big purchase. It’s hard to teach that.
Reminds me of what my uncle said to me about 20 years ago that stuck with me: “There’s a lot of money to be made in poverty.”
“My Sailors are constantly getting themselves into financial messes due to these rip off places.”
I personally think these places are abominable, but my gut tells me that government crack downs from Congress is going to have ill effects on all of us.
Payday loans and “rent to own” places make a profit by making it easy for otherwise unqualified borrowers to walk away with instant goodies. In return, they charge horrible interest rates and are a poor choice for doing business with. But credit card companies are doing the same thing, jacking up rates to 20 to 30 percent APR. leaving people that owe balances in the same boat. The only good solution is to not live on credit.
This business should be shuttered.
I believe that congress passed a law within the last year of so that effectively outlawed Payday Loan companies from dealing with active duty military. They capped the maximum interest rate at 36% APR, which is a rate that will put payday loan companies out of business. If your troops are still using payday loan companies, they're committing fraud, by misrepresenting their employer. Or if the company is aware, they need to be shut down.
Mark
Second dumbest comment commonly heard about customers of payday loan companies... Of course, #1 is, "They want customers who can't pay back the loans."
Only the government can survive with those business models.
Mark
Why are they comparing payday loan fees to checking account overdraft fees? The obvious alternative to not taking out a payday loan is to pay some bills late, not to start writing bad checks. Surely if these payday loan customers are so rational and well-informed, they can figure that out. Late credit card payments also carry a fat fee, of course, but not any more that bounced checks. And a lot of bills carry either no late fee or a very small one (utilities, rent, etc).
You’re arguing past each other.
Of course no one who loans money wants their customers to default (the default rate is over 30%).
But they DO want customers who DON’T (not can’t) pay back their loans and keep getting dipped every two weeks for the service charge. Steady cashflow.
I ask you both, though, where would these people go for short term money if this business were outlawed?
Vinnie down on the corner?
You think Vinnie will stop with sending you to collections when you default?
Congress needs to deal with the @$$holes that are ignoring the “Do Not Call” list by using spoof numbers and Caller ID blocking. I say we hang ‘em by their privates. I’m so sick of these rotten b@$t@rds I could scream.
The selection above quotes nearly 400% APR. The horror! The problem with this is that the term of the loan is NOT 1 year. It's 2 weeks. The amount charged on the loan is $15 on $100 for 2 weeks. Expensive? You bet. But this is a lender of last resort for many people who have nowhere else to turn. For one reason or another, they need some money right now, but can't get it anywhere else.
In all fairness, I will admit that I DO work for one of the larger payday loan companies, but when I was right out of high school, I needed their services, but they were illegal in my state at the time. I needed to come up with $800 for auto repairs, but I only had $250 in savings. I had nobody and no place to turn. Finally, I found a drug dealer who was willing to loan me the $550 I needed, and he gave me 1 month to pay it back, along with another $550 "interest."
It would be nice if banks would offer low cost, small amount loans, but they don't. Credit unions do have "signature loans" available, but you have to be a member in good standing with a decent credit history. The fact is that these places "retail money," and as such they tend to serve people with poor or no credit, and tend to be pretty bad risks. As such, they have no place else to turn, other than possibly, criminal enterprises, the way I did.
These laws cap the fees and "APR" that payday loan companies can charge at 36%. Think about that for a second. Because the loan term is 2 weeks, that means that the payday loan company would be able to charge about $1.38 on a 2 week, $100 loan. The simple fact is that no company could possibly stay in business at that rate.
Mark
I once held that same opinion. I used to work for a legislator, and there was a bill introduced to cap the rates on these loans. My legislator voted against it. Later that day, when we were chatting, I asked him why he voted against it—I said the same thing you did; the places take advantage of the poor, charge absurd interest rates, etc.
He said to me, Publius, you and I have led privileged lives. Our parents were not poor, they sent us to good schools, they always made sure that we did not want. If we need money, we can go to the bank and get a loan. Others are not so fortunate, and these places are a way for them to get money that they desperately need. If we close these stores, what does that accomplish? These people will still need money, but then, no one will give it to them. Who does that help?
I’ve reflected on that conversation some over the years, and I think that he’s right. There are some people that DO need the money, and there is not another way for them to get it. Rather than default on their obligations, they choose to get a payday loan. I’m OK with that.
Shut these bottom feeders down. Some claim this country is a Christian country, yet wink and nod at the usury of payday loans.
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