FDIC: Payday Loans a Superior Form of Short Term Credit 31 comments
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This is the first in a series of articles on the payday loan industry.
The November 2008 FDIC Study of Bank Overdraft Programs (ODP) proves beyond the shadow of a doubt what we've known all along: payday loans are a much cheaper short-term credit alternative than bank overdraft protection programs.
The data is astonishing, and unequivocally demonstrates that as consumer activists and grandstanding politicians rake payday lenders over the coals, they ignore the bloodsucking that occurs every time a consumer bounces a check.
This is good news for payday lenders First Cash Financial Services (FCFS), EZCorp (EZPW), Cash America (CSH), QC Holdings (QCCO), Dollar Financial (DLLR) and the venerable Advance America (AEA), as well as the other private companies operating in the sector. Instead of usual assortment of frivolous mendacities tossed out by corrupt charities, ideologues, ignorant activists, and uneducated legislators, these same people will have to deal with – GASP – facts.
And here they are. In 2007, storefront payday lenders provided 154 million loan transactions and collected $6.8 billion in fees. Meanwhile, Bretton Woods Inc, a bank strategy consulting firm, estimates that consumers will overdraw their accounts 1.22 BILLION times in 2008, allowing banks and credit unions to collect more than $35 BILLION in fees.
The average transaction size resulting in an overdraft fee was $60. The average overdraft fee was $27.
You can get a $60 payday loan in most states for $9.
Let me just repeat that again, for all you payday loan opponents out there.
You can bounce a check for $60 and get charged $27 in NSF fees by your bank, or you can take out a $60 payday loan for $9.
Not even the ideologues can counter this argument. Simple fact. Right there in black and white. Just read the entire report yourself.
But wait, there's more. In states where payday loans were forced to shut down by foolish legislators, the average annual amount of NSF fees charged to consumers was just under $541. In states where payday loans are permitted, that amount is only $240.
In addition, the payday loan industry has long argued, correctly, that attaching an APR to a two-week loan is a misleading and inaccurate way for consumers to assess the product's relative cost. It's been proven time and again that the consumer doesn't care what the APR is for a payday loan. They make their decision based on the absolute dollar amount of the loan.
Nevertheless, in order to conform with TILA, they agree to post APR's. These run between 391% and 520%. Since they're being forced to disclose that useless APR, then let's do the same with NSF Fees. A $60 transaction that results in a $27 NSF fee translates to a 1,165% APR.
Payday loan opponents always run for cover when the facts hit them in the face. I expect them to run even faster now. As for the stocks of each of the above-mentioned companies, they've been marked down by threatened federal legislation. I'll discuss that in an upcoming article, and why it is so misguided.
For now, however, the stocks all remain ridiculously cheap strictly on a fundamental basis.
Full Disclosure: At the time of writing, Lawrence Meyers was long shares of EZCORP, and held April call options on Advance America and EZCORP.
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This article has 31 comments:
Your conclusion is not supported by your argument.
Why do you consider payday loans to be a "rip-off?"
Fact: 6 million Americans have a need for short-term credit.
Fact: There are limited options.
Fact: 154 Million transactions demonstrate that consumers choose payday loans of their own free will to meet their credit needs.
YOU may consider them a"rip-off", but I'm also betting that you've never, ever, ever needed or used a payday loan, been to a store, talked to customers or owners, or can suggest a cheaper alternative.
On Mar 25 08:26 AM monday1929 wrote:
> One bad rip-off does not justify another rip-off. Your comparisons
> are meaningless, and many of those overdrafts result from banks re-ordering
> withdrawals to make more checks bounce.
On Mar 25 08:26 AM monday1929 wrote:
> One bad rip-off does not justify another rip-off. Your comparisons
> are meaningless, and many of those overdrafts result from banks re-ordering
> withdrawals to make more checks bounce.
@ Corcoran: You totally missed the other commenter's point. It's not a matter of whether deposits or withdrawals are posted first -- the issue is the order in which withdrawals are posted. As a standard operating procedure, many institutions post large withdrawals before smaller withdrawals (on the premise that large withdrawals are more likely to be something truly important, like your mortgage or car payment and thus should be paid first). This procedure causes more overdrafts because large withdrawals clear out the account faster than several small withdrawals would. Once the account has been drained by a large check, each small item incurs an overdraft fee. If you reverse the process, more checks would be paid before any bounced check fees are incurred. As you said, "Please limit your comments to your expertise."
Yes, while the FDIC report does not mention payday loans, the conclusion is 100% supportable, ipso facto.
It makes for a better headline, but in no way does it misrepresent the truth.
On Mar 25 11:37 AM Factcheck wrote:
> @ Mr. Myers: Your headline is totally misleading. The FDIC report
> never even *mentions* the word "payday" in it, much less reach the
> conclusion that "payday loans a superior form of short term credit."
>
>
> @ Corcoran: You totally missed the other commenter's point. It's
> not a matter of whether deposits or withdrawals are posted first
> -- the issue is the order in which withdrawals are posted. As a
> standard operating procedure, many institutions post large withdrawals
> before smaller withdrawals (on the premise that large withdrawals
> are more likely to be something truly important, like your mortgage
> or car payment and thus should be paid first). This procedure causes
> more overdrafts because large withdrawals clear out the account faster
> than several small withdrawals would. Once the account has been
> drained by a large check, each small item incurs an overdraft fee.
> If you reverse the process, more checks would be paid before any
> bounced check fees are incurred. As you said, "Please limit your
> comments to your expertise."
Any bank, any company, any person may offer an alternative to payday loans. What you'll note, however, is that PDLs have been around for 20 years and nobody has tried to offer an alternative.
Do you know why? Because there is no supportable business model that can provide this service. The market has proven this out.
I have a standing offer to any PDL opponent, activist or politician: If you can devise a product that meets the consumer's needs while providing a reasonable lender profit, my firm will fund it and make you a partial owner.
Nobody has ever even suggested a business model.
On Mar 25 11:59 AM oldbanker wrote:
> Why are the banks not providing short-term small credit? They have
> chased low income people out of the system with high fees, bad service
> and bad policies. They enjoy taxpayer protection and this is what
> we get? With all their "expertise" they should be able to provide
> an alternative to payday lenders.
The headline is *your* conclusion, not that of the FDIC. And superior? To what? Oh... another crappy form of credit. That's like saying that cirrhois of the liver is superior to lung cancer.
An honest headline would have been "Myers: FDIC Report Shows Payday Credit Superior to Overdrafts." As you should know, the implication of the "X: Headline" usage is that X has actually said or concluded whatever follows the colon. You should know better.
On Mar 25 12:47 PM Larry Myers wrote:
> Factcheck:
> Yes, while the FDIC report does not mention payday loans, the conclusion
> is 100% supportable, ipso facto.
>
> It makes for a better headline, but in no way does it misrepresent
> the truth.
We can argue semantics until the cows come home. You don't like the headline? Tough. That's called a "headline that hooks".
However, the conclusion is, indeed, ipso facto. The truth is inevitable and unavoidable, unless you live in an alternate reality where $9 is not less than $27.
Fact: ODP and NSF Fees are more expensive than payday loans.
YOU may consider payday loans a source of "crappy credit", but your elitist tone suggests you have never had the need for short-term credit.
Guess what? Millions of Americans do, on a daily basis. And 154 million transactions last year makes it clear: Americans are smart enough to recognize the best deal available. THey don't consider it "crappy credit". They consider it a lifeline.
As to my "elitist tone" -- I'm opposed to people getting screwed on short term credit. How is that elitist? Payday lending, overdraft-based loans and rent-to-own stores are all raw deals that prey upon people who don't have access to reasonably-priced microloans. Affordable microloans are the truly superior form of credit.
On Mar 26 02:25 AM Larry Meyers wrote:
> factcheck:
> We can argue semantics until the cows come home. You don't like
> the headline? Tough. That's called a "headline that hooks".
>
> However, the conclusion is, indeed, ipso facto. The truth is inevitable
> and unavoidable, unless you live in an alternate reality where $9
> is not less than $27.
>
> Fact: ODP and NSF Fees are more expensive than payday loans.
>
> YOU may consider payday loans a source of "crappy credit", but your
> elitist tone suggests you have never had the need for short-term
> credit.
>
> Guess what? Millions of Americans do, on a daily basis. And 154
> million transactions last year makes it clear: Americans are smart
> enough to recognize the best deal available. THey don't consider
> it "crappy credit". They consider it a lifeline.
>
>
>
>
"I'm opposed to people getting screwed on short term credit. How is that elitist? Payday lending, overdraft-based loans and rent-to-own stores are all raw deals that prey upon people who don't have access to reasonably-priced microloans. Affordable microloans are the truly superior form of credit."
I said if before, Factcheck, and I"ll say it again.
Show me one single source of short-term credit that meet consumer needs and provides a reasonable profit for lenders, and not only will my firm fund it, we'll cut you in as part owner.
This open and standing invitation has been made to every single activist, PDL opponent and politician...and nobody has ever taken us up on it, or even submitted a business plan.
So here's your big chance. Tell us how you would create this microloan product, how you would sell it, underwrite it, provide it, collect on it, and how much you would charge. Very simple.
Or, let me save you time. It's impossible. It's called the free market -- if such a thing were possible, someone in the past 20 years would have come up with it.
Furthermore, every single person uses the products you cite of their own free will. Why do think 154 million transactions occur annually?
Unfortunately we have yet to develop the technology to reduce credit and transactional costs to what is a very high risk segment of the population. One argument I will make in favor of the industry is that it does provide a product that people want, and probably need.
To gain sense of perspective, it helps to put one's self in the shoes of the consumer of this product. You have $40 in your checking account, you owe a minimum payment to your credit card company of $20, you need $30 to buy food for your family, what do you do? Without one of these products you don't make the minimum monthly payment on your credit card, which results in you owing them $40 in late fees, plus having to pay default interest on the balance (say 25%+). With an Overdraft, you pay you minimum monthly payment, and pay the bank say $30, already a net savings of $10.
Though I do not have historical data, I suspect that Pay Day lenders are the latest in the evolution of the short-term small liquidity lending products that started with pawn shops, evolved into credit cards and overdrafts. At each step, costs have been cut (these industries wouldn't exist if that wasn't the case), and I am optimistic that over time new forms of this product will emerge, each time looking to undercut the status quo in terms of costs, until we reach a highly efficient capital market for these similar to that available to the more moneyed segment of the population.
Perhaps a philanthropist with the wherewithal might follow the lead of the X prize people and put up $50 million as a prize to a group who can profitably provide loans from $50 to $1000 over a 12 day period of time for an APR less than say 14%? That would likely jumpstart the necessary technological development.
With all that money at stake, a brilliant entrepreneur would have found a way to do what you say if there was a way.
On Mar 26 03:06 PM Larry Meyers wrote:
> Then let's get to the point:
>
> "I'm opposed to people getting screwed on short term credit. How
> is that elitist? Payday lending, overdraft-based loans and rent-to-own
> stores are all raw deals that prey upon people who don't have access
> to reasonably-priced microloans. Affordable microloans are the truly
> superior form of credit."
>
> I said if before, Factcheck, and I"ll say it again.
>
> Show me one single source of short-term credit that meet consumer
> needs and provides a reasonable profit for lenders, and not only
> will my firm fund it, we'll cut you in as part owner.
>
> This open and standing invitation has been made to every single activist,
> PDL opponent and politician...and nobody has ever taken us up on
> it, or even submitted a business plan.
>
> So here's your big chance. Tell us how you would create this microloan
> product, how you would sell it, underwrite it, provide it, collect
> on it, and how much you would charge. Very simple.
>
> Or, let me save you time. It's impossible. It's called the free
> market -- if such a thing were possible, someone in the past 20 years
> would have come up with it.
>
> Furthermore, every single person uses the products you cite of their
> own free will. Why do think 154 million transactions occur annually?
>
>
>
But, more to the point, these loans were generally larger than what payday customers needed, cobbled together over months from many individual lenders, with default rates from similarly creditworthy borrowers that matched payday borrowers, for which the lenders got far less in fees.
Payday loan customers need loans immediately.
They need them for a short period of time.
You still can't justify your self-serving, misleading, bait-and-switch headline. But, hey, what else should we expect from an apologist for and financier of the payday lending business?!?
By the way, you've just admitted that your client base is desperate ("they need loans immediately"). It's nice to know that you're there waiting to take advantage of that desperation.
On Mar 26 08:22 PM Larry Meyers wrote:
> Nice try, FactCheck. It is a fantastic idea, which I completely
> support. However, the P2P websites are falling apart. Prosper.com
> is not taking any more lenders.
>
> But, more to the point, these loans were generally larger than what
> payday customers needed, cobbled together over months from many individual
> lenders, with default rates from similarly creditworthy borrowers
> that matched payday borrowers, for which the lenders got far less
> in fees.
>
> Payday loan customers need loans immediately.
> They need them for a short period of time.
People who use payday loans need the money now. P2P lending takes weeks, if not months, for need to be fulfilled.
Funny how precise you insist on being concerning the definitions of logic terms, yet when it comes to actual logical debate and "facts" (with your equally ironic name), you don't have any to support your position.
There is no such thing as an "apologist" for the payday loan industry because there is nothing to apologize about. Again, I ask, for people in need of emergency short-term credit, why do they choose payday loans 154 million times each year?
Educate yourself first, then when you're ready to truly have a debate about the product, I'll be waiting (but not holding my breath).
You can start here.
www.buckeyeinstitute.o...
Your ad hominem attacks are a sure sign of your weak mind and weak argument. You can't address the facts, so you attack the person.
It's you who uses deception in your headlines, makes false assertions about the death of P2P lending, and dismisses other viewpoints because they don't comport with yours. All I'm doing is pointing it out. It doesn't take an idealogue to do that.
I hope you got a good price for your soul.
On Mar 27 02:13 PM Larry Meyers wrote:
> Well, "FactCheck" or should I call you "LackOfFactCheck", having
> outed yourself as an anti-payday lending ideologue who has no clue
> about the industry, the product, or its usefulness to those in need
> in short-term credit, I guess that's where the conversation ends.
>
>
> People who use payday loans need the money now. P2P lending takes
> weeks, if not months, for need to be fulfilled.
>
> Funny how precise you insist on being concerning the definitions
> of logic terms, yet when it comes to actual logical debate and "facts"
> (with your equally ironic name), you don't have any to support your
> position.
>
> There is no such thing as an "apologist" for the payday loan industry
> because there is nothing to apologize about. Again, I ask, for people
> in need of emergency short-term credit, why do they choose payday
> loans 154 million times each year?
>
> Educate yourself first, then when you're ready to truly have a debate
> about the product, I'll be waiting (but not holding my breath).<br/>
>
> You can start here.
>
> www.buckeyeinstitute.o...
>
>
>
>
STICK TO THE ISSUE. LackOfFactCheck, you aren't even discussing payday loans now! You're too wrapped up in your own ego to address the issue at hand.
The issue is payday loans, and your statements simply prove you are an ideologue.
www.bloggernews.net/11...
Payday loans are necessary for people to meet short-term credit needs.
They are reasonably priced given the risk involved for the lender.
When used responsibly, they offer unquestionable benefit to the user.
The number of responsible users outnumber irresponsible ones by at least a 15-1 ratio.
The primary alternative to payday loans are bounced checks, which are 3 -4 times more expensive.
And the list goes on and on.
One of the key reasons I dislike them -- which you never asked about -- is that they encourage people to live beyond their means. Nonetheless, if someone chooses to incur a $15 fee per $100 borrowed, and that fee is clearly disclosed to them, I don't necessarily think they should be precluded from entering into that transaction. But how many of those people are on welfare, food stamps or other forms of public assistance, suggesting that the $15 is effectively being paid for by the taxpayer?
And for the record, I still think your headline is a total lie.
On Mar 27 04:03 PM Larry Meyers wrote:
> Here, I'll even help you out. Discuss:
>
> Payday loans are necessary for people to meet short-term credit needs.
>
> They are reasonably priced given the risk involved for the lender.
>
> When used responsibly, they offer unquestionable benefit to the user.
>
> The number of responsible users outnumber irresponsible ones by at
> least a 15-1 ratio.
> The primary alternative to payday loans are bounced checks, which
> are 3 -4 times more expensive.
> And the list goes on and on.
>
I would argue that PDLs do not encourage people to live beyond their means. It is simply a form of short-term credit.
As for the article not being written with clarity and reason, what specifically about the TEXT do you object to?
It's pretty simple. ODP fees are way more expensive.
"Proves beyond the shadow of a doubt..." Nope. If it does, no one would be discussing it any more.
Astonishing... unequivocal... grandstanding.. raking over the coals... bloodsucking... "frivolous mendacities tossed out by corrupt charities, ideologues, ignorant activists, and uneducated legislators." In other words, anyone who doesn't agree with you is stupid, uneducated, ignorant, etc. And you don't think *you* sound like an idealogue? Time to look in the mirror.
As for the journalism business -- it too has stardards. You're treading into the territory of yellow journalism. And while I might not expect better from you, I certainly expect better from Seeking Alpha. Simply stated, you failed to live up to the site's usually high standards.
To put things in a different perspective, I view you as the financial equivalent of an abortionist. It's legal. There's a demand for it. It serves a social purpose. But that doesn't mean I have to like it, support it or view it as ethical. Thems the breaks.
On Mar 27 06:05 PM Larry Meyers wrote:
> Well then, now we're getting somewhere. If you have a problem with
> the headline, all I can say is, "Welcome to Journalism".
>
> I would argue that PDLs do not encourage people to live beyond their
> means. It is simply a form of short-term credit.
>
> As for the article not being written with clarity and reason, what
> specifically about the TEXT do you object to?
>
> It's pretty simple. ODP fees are way more expensive.
But you yourself continue to make fallacial statements and have several facts utterly wrong.
""Proves beyond the shadow of a doubt..." Nope. If it does, no one would be discussing it any more."
Wrong. Just because something is proven unequivocally, ideologues and those with agendas will continue to press their points, especially when political power and money is at stake.
"In other words, anyone who doesn't agree with you is stupid, uneducated, ignorant, etc."
Well, to be honest, yes. And that goes back to the facts. They are really quite simple, but people like you refuse to even examine them.
"As for the journalism business -- it too has stardards."
You must not have been paying attention to the journalism business over the past few years, particularly during the last Presidential campaign.
And, by the way, SeekingAlpha is made up of quite a large amount of Op-Ed pieces, of which mine is one. It also happens to have journalistic integrity. I don't know what you're harping about over my headline. Have you looked at any newspapers lately? The goal was to get you to read the article. You did.
"I view you as the financial equivalent of an abortionist."
That's fine. I view you as an ignorant ideologue who fancies himself a logician, yet fails to live up to his own standards. Them's the breaks.
"It's legal. There's a demand for it. It serves a social purpose. But that doesn't mean I have to like it, support it or view it as ethical."
Of course not! This is America. It's a free country. But if you want to blather on about it being unethical AND wish to be taken seriously, you need to support your argument with evidence.
So far you haven't.
What would you consider to be "ethical" with respect to short-term lending?