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.