Will Obama Hurt the Profitability of Payday Lenders? 16 comments
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With unemployment hitting record highs and consumers across the country strapped for cash, payday lenders and pawnshops seem like a obvious area to profit from this unfortunate trend. Pawnshops, of course, engage in supplying small loans to individuals using their personal valuables as collateral. Payday loans, also known as payday advances, are similar. The consumers gets a short-term loan using his next paycheck as collateral. Usually, the customer must hand over a post-dated check before receiving the cash. If he fails to return to the store and pay back the loan, the lender can take the amount right out of the customer’s checking account.
Coming Under Fire
Various public companies engage in one or both of these businesses, such as First Cash Financial Services (FCFS), Cash America International (CSH), and EZCORP Inc. (EZPW). These companies often come under heat from governments and consumer groups who claim they take advantage of the poor and desperate by charging exorbitant fees and interest rates. For example, a store might charge $15 for a two week, $100 loan. This equates to an annual percentage rate (APR) of roughly 390% (15% * 26). When this loan compounds due to the the customer not being able to pay the loan back on time, as is often the case, the effective annual rate grows exponentially. Anti-payday lending groups say these high rates force individuals into debt traps, often using new payday loans to pay off the old ones. These groups want APRs capped at much lower rates. Many states, such as Georgia and North Carolina, have banned the payday lending business altogether.
Payday lending companies, however, say they provide a valuable service to those in unfortunate situations requiring small cash loans to help pay for short term expenses. Traditional banks would never supply these individuals with loans, so payday lenders fill the void in the marketplace. Capping interest rates at much lower APRs would effectively ruin their businesses, as the seemingly high rates pay for their high cost of doing business.
Legislative Risk
With a new administration, especially one portraying itself as a staunch defender of consumer rights, the concern of more legislation on payday lenders is hitting Wall Street. According to Obama’s campaign website, www.barackobama.com, the President and Biden will demand more disclosure from payday lenders and institute a 36% cap on any and all loans to Americans. The site also claims he will “encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small-dollar loans and to drive unscrupulous lenders out of business.” Obviously, following through with any of these promises will be detrimental to the payday loan business.
Regulation has to be the number one concern for anyone considering investing in one of these companies. Obama will mostly likely remain busy with other, more important issues, such as the ~$800 billion stimulus package he is currently trying to push through, at least for the short-term. With various states cracking down and the federal government potentially getting in the mix however, the livelihood of the business models is most definitely at risk.
Fleeing for the Borders
Some companies are doing something to protect against this risk. First Cash Financial Services, for example, has been steadily expanding into Mexico for years. The Mexican population is extremely under-banked, meaning payday lending locations provides the majority of their financial services, from taking out loans to 
cashing checks. FCFS had approximately 251 locations in Mexico in December when it acquired Presta Max, a privately-held chain of 16 pawn stores in southern Mexico. After the acquisition, over half of FCFS’s 521 locations are now in Mexico. It seems apparent that the company recognizes that its future lies abroad.
With the threat of new regulation looming, and the negative sentiment from state governments already present, any potential investor in a company engaging in payday lending needs to be cautious. Rumors of new regulation will be the number one downward driver of these stocks going forward. The best way to defend against this risk for those wanting exposure to this business during the recession is to find companies actively protecting against the “Obama risk.” Lobbying is one popular strategy, but I personally prefer expanding outside of Obama’s reach altogether.
-Harry Lacheen
Disclosure: The author and the author’s family are long FCFS.
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Credit card last payment...whats the APR?
Bounced check...whats the APR?
Negative credit report, and thus high interest car and home loans...whats the APR?
Negative checking balance fee...whats the APR?
These fees as APRs are in the hundreds, just like Payday loans accept a loan is taken with free will, while the others are levied upon people losing control of their finances. Anyone with the intellect to use a computer, should be able to see anti-PDL laws as pure politics of the worst kind...SO yes lets cap PDLs at 36%, and raise bounced checks fees to 500%. Fools!
How about compete with these PDL companies with a subsidized product, or something to compete, but outlawing choice is just crazy.
The worst part is that credit companies/banks/lender... have all but turned their back on these people, and if not LOVE charging every fee under the sun (without APR calculations)...so next they turn to drug sales, thieft, or prostitution.
Long EZPW, which only has 20% rev. in PDL, and growing in the most significant downturn since 1945
And I am speaking as someone who has actually had payday loans.
First and most important, the customer is participating of his own free will. Many in this country would like to make all of our decisions for us, but there are still plenty of us who prefer to make our own decisions in life, even if they are not the best decisons. (I consider the "Right to be an Idiot" the unwritten amendment to the Constitution)
Payday loans do not require credit checks. You need a job and a checking account. If you are a complete deadbeat con-artist scammer, you still only need a job and a checking account. There is a lot of risk in this business.
Payday loans are almost always a "last resort" type of loan. The customer is usually already in way over his head, and has borrowed all he can from friends and family, as well as maxing out every last bit of credit-- if there was ever anything creditworthy in his life-- eons ago. The customer may be on the way out of the state or the country, and is just picking up extra cash for the exit, with no intention of ever paying it back. When his post-dated check bounces (usually stamped "account closed"), the PDL business will try to find the customer and take him to small claims court. If the customer is found and the court case is successful, there is still the matter of collecting. More fees for garnishing wages, etc.
The stories you hear about 400% interest are pretty unfair, really. Yes, it probably works out to be that much, but what we are really talking about is a stranger will loan me a couple hundred dollars for 2 weeks and I just need to prove I have a job and write him a post-dated check. I think I paid about 10% of the amount in fees (It was about 10 years ago). It was a very difficult time, and I was embarrassed to be in a PDL store, but it got me through the situation. That is all that has ever mattered to me. I would guess that most real people (not the phony crying people who are trotted out in front of Congressional hearings to tell how they were taken advantage of during a vulnerable time in their life) that use the PDL service would tell you that they are glad the service was available.
People go the a PDL store because they are out of options. It is a high-risk business to make loans to desperate strangers with just a post-dated check for collateral. I don't have any issues with high risk businesses earning high rewards.
On Feb 04 04:14 PM Harry Lacheen wrote:
> I'm not arguing over the morals of the business, I'm debating the
> merits of the investment.
Millions of people in this country CHOOSE to use the services. They do so because there isn't anybody else who will lend to someone with their credit rating.
So let's just shut down thje PDL businesses. Then who will make these unsecured loans to bad credit risks ? Will you ? I think we all know the answer to that question. And people who need a small loan to get past an emergency or prevent eviction will have absolutely nowhere to turn. How in the hell is that compassionate or moral ?
If you really have a solution that would stand up to critical analysis, let's hear it. The PDL business has been around for more than a decade and that should have been plenty of time for all of you to come up with a better idea. So far, you have offered absolutely nothing. And stop trying to make "victims" out of people who execise free will.
Maybe they could next take up bank fees and universal default rules. and then the doubling of fines by local and state governing bodies. And then .....
On Feb 05 02:50 AM sittingoutthisrecessio... wrote:
> This "morality" argument is nonsense. Typical arrogance of the "We
> know what is best for everybody" crowd.
Arrogance? Typical? Of course, your bankrupt ideas about any LEGAL way to make a buck are neither arrogant or typical, hmmm?
> So let's just shut down thje PDL businesses. Then who will make these
> unsecured loans to bad credit risks ? Will you ? I think we all know
> the answer to that question. And people who need a small loan to
> get past an emergency or prevent eviction will have absolutely nowhere
> to turn. How in the hell is that compassionate or moral ?
It's compassionate and moral in that once someone chooses to make the foolish decision of taking 390+ APR loan they will forever be indebted and will toil only to service the debt. Even Christ threw the money changers out!
> If you really have a solution that would stand up to critical analysis,
> let's hear it. The PDL business has been around for more than a decade
> and that should have been plenty of time for all of you to come up
> with a better idea. So far, you have offered absolutely nothing.
> And stop trying to make "victims" out of people who execise free
> will.
Just because something has been around for a decade doesn't make it right.
The better idea is to put these loan sharks (ala Tony Soprano, as the commenter above stated) out of business for their usurious nonsense.