Are Payday Lenders Saviors or Predators?

Payday Lenders Serve The Financially Inept

One of the fastest growing lending businesses in the country has been “payday lending”. Without the hassle of a credit check or application, a payday lender will give an employee a cash advance to carry him over to his next paycheck. There has been huge consumer demand for payday loans as reflected by the growth of payday storefronts to 25,000 today from zero in 1990. Convenient locations and quick easy cash entice consumers to take a one week loan on a $300 paycheck for a $50 fee.

Payday lenders argue that the credit losses, overhead costs and the complexity of administering millions of small loans require them to charge high fees to stay in business. When Pennsylvania capped interest based fees on payday loans, the payday lenders disappeared from the State.

Responsible Lending.org has characterized payday lending as predatory and forcing borrowers into a vicious cycle where each loan is paid off with another loan resulting in huge fees to the borrower. Effective annual interest rates can exceed 800%.

A full three quarters of loan volume of the payday lending industry is generated by borrowers who, after meeting the short-term due date of the loan, must re-borrow before their next pay period.

Repeat borrowing of what is marketed as a short-term loan of a few hundred dollars has long been documented, but this report verifies for the first time how quickly most payday lending customers must turn around and re-borrow after paying off their previous loan.

Payday lenders generate loan volume by making a payday loan due in full on payday and charging a sizeable fee—now nearly $60 for an average $350 loan. This virtually guarantees that low-income customers will experience a shortfall before their next paycheck and need to come right back in the store to take a new loan. This churning accounts for 76 percent of total loan volume, and for $20 billion of the industry’s $27 billion in annual loan originations.

Payday lenders argue that they are lenders of last resort and provide vital credit that cannot be obtained elsewhere. If payday lenders cease operating, how would those who had relied on the payday loan get by?

North Carolina provides an example of how consumers fared after payday lending was closed in 2006. Here are the results of a study done by the Center for Community Capital:

Researchers concluded that the absence of storefront payday lending had no significant impact on the availability of credit for households in North Carolina. The vast majority of households surveyed reported being unaffected by the end of payday lending. Households reported using an array of options to manage financial shortfalls, and few are impacted by the absence of a single option - in this case, payday lending.

More than twice as many former payday borrowers reported that the absence of payday lending has had a positive rather than negative effect on their household.

Payday borrowers gave first-hand accounts of how payday loans are easy to get into but a struggle to get out of.

Nearly nine out of ten households surveyed think that payday lending is a bad thing.

As was the case with aggressive no income and sub prime mortgage lending, many people will borrow money despite onerous fees and high rates. Financially desperate consumers giving up 15% of their next paycheck to have money a week early are clearly not helping their financial situation. The government cannot prevent people from making foolish financial decisions, but in the case of payday lending, tougher regulation seems necessary to protect the financially inept.

Ironically, despite the high fees charged by payday lenders, it turns out that investors fared no better than the payday borrowers. Earnings have generally been trending downwards and stock prices have declined significantly. New State or Federal fee restrictions on the payday lending industry would crush loan growth and profits. Investors in QC Holding (QCCO) and Advance America, Cash Advance Centers (AEA) are likely to face continued disappointing returns.

Disclosures: No positions.

Comments

[john s. gordon:]

they are bloodsucking parasites preying upon those least able to cope with the high costs imposed.
deserve to be run out of town.
> jack

Jul 14 08:16 AM

[Brian C:]

I believe your comments are uninformed and misguided just like the article. I especially like when Mr. Zielinski talks about,"the absence of storefront payday lending had no significant impact on the availability of credit for households in North Carolina," the fact is it may not but the State of North Carolina had an increase of $50 Million dollars in NSF fees alone after the payday lenders left but there is probably no correlation, right? Payday lending is a fee based service, if rates are so absorbant why do consumers keep using them? Educate yourself on the topic before you judge.


On Jul 14 08:16 AM john s. gordon wrote:

> they are bloodsucking parasites preying upon those least able to
> cope with the high costs imposed.
> deserve to be run out of town.

Jul 14 10:02 AM

[stockferret:]

The real bloodsuckers are the banks. They charge $39 to overdraft by pennies. Does anyone even know how much they are allowed to overdraft? At least with Payday lenders you know exactly what you are getting and how much you are going to pay for it. If the banks really thought Payday lenders were making too much money they would compete for the business instead of spending millions on lobbying to outlaw it.

Quite frankly, if banks and the MSM are against Payday lending it must be a good thing for consumers. That is a good general rule for everything.

Jul 14 10:11 AM

[Albert Meyer:]

John S Gordon needs to familiarize himself with banks if if he wants to meet some first class bloodsuckers.

If the choice is a payday loan or a loan shark, I'll take the payday loan. Everything is above board and fully disclosed. Unlike the loan sharks they don't go for your kneecaps either.

If you need $200 to get your car fixed so you can go to work on Monday and not lose your job, no bank in the land will come to your aid.

In 2008, AEA lost $168 million in uncollectible loans. It's a two way street. High risk involved in extending a helping hand.

Jul 14 10:26 AM

[flow5:]

Take out as many payday loans as they will give you. You won't be charged for writing a bad check. Just cancel your checking account. They are just loans.

Jul 14 06:09 PM

[rkzmgmt:]

Yes, you will "pay" for writing a bad check in more than one way. Primarily, writing a check on a closed account is fraud...fraud is illegal...and depending on the amount of the check it may be a felony. That mentality is exactly how people get into trouble by abusing loans.


On Jul 14 06:09 PM flow5 wrote:

> Take out as many payday loans as they will give you. You won't be
> charged for writing a bad check. Just cancel your checking account.
> They are just loans.

Jul 15 05:33 PM

[Payday Lender:]

Payday loans are often the best loan option for many consumers and have been a savior to many. They are affordable and easy to obain and add a great deal to a state's GSP and contribute heavily in taxes.

Jul 16 07:52 AM

[Payday Loan...:]

PAYDAY LOANS STINK! The political climate is changing and their end is near. Their store fronts are becoming more and more dangerous places to work. Their disgruntled clients are getting smarter, banding together and learning how to fight back. Payday Loan companies offered some valuable service to the community, but for too long, we've been playing by the unfair rules written by these powerful companies. PAYDAYLOANSSTINK.COM welcomes them to exist, but its time that the playing field is leveled. Payday Loan companies have proliferated through intimidation and misinformation for too long. PAYDAYLOANSSTINK.COM exists to give you - the consumer & the employee - the information you need to gain the upperhand. To escape their devious cycle-of-debt trap! PAYDAYLOANSSTINK.COM invites every one affected – including employees of the industry – to join in the discussion and learn from each other.

- JUST STOP PAYING! Always remember to put a Stop Payment on your check. It forces them to stop charging interest and negotiate a payment on your terms. Not theirs!

- Did you know that by sending them a simple Cease And Desist letter by certified mail, you can get all of their harassing phone calls – to you, your work and your family - to stop?

- And did you know that many Payday Loan store fronts are blatantly breaking laws every day? That a simple letter to your City Council or your Attorney General could help to shut them down? Or even get some of your money refunded?

- THE “EPP” EXTENDED PAYMENT PLAN – Available at nearly 70% of the nation’s Payday Loan stores, but yet you are never told about the EPP - “Right now your Payday Loan store is offering a three-month, interest-free payment plan for anyone who has a current loan! Save hundreds of dollars in interest. That’s right! Whether it’s Advance America, Check Into Cash, Quik Cash, Check N Go or some other Payday Cash Advance company, just tell them you are tired of paying interest and would like your FREE EPP. The Extended Payment Plan. Ask for it today before it’s gone!”

PAYDAYLOANSTINK.COM thanks you for taking the time to read this quick comment. Our new site has much more detailed information available regarding the topics above. As well as – “Small Claims”, “BBB & FTC Complaints”, “Arbitration Agreements”, Community Forums & more!

Jul 16 03:26 PM

[RobinBanks:]

When was the last time a bank or payday lender rep came to your door to force you to open an account or borrow money from them? NEVER! The problem is the stupid, uneducated sheeple.
If you like paying a $39 overdraft fee for 5 cents because you can't count then you are an effing idiot.
If you borrow $300 and agree to pay a $50 fee, you made that agreement with your own free-will.
Much of the financial problems in our country is the unwillingness of so many people to be accountable for their actions and instead want to blame others. FREAKS!

Aug 27 10:22 PM

[RobinBanks:]

Oh, forgot to mention. Yes, I made a bundle with Payday Lender Stocks...........stupid sheeple.

Aug 27 10:27 PM