Quote of the Day on Payday Loan Propaganda
"The mindset of the left was recently displayed in a big, front-page story in the October 30th issue of the San Mateo County Times. It was an investigative reporter's expose of the "payday loan" business and its lobbyists. According to the reporter: "In California lenders charge up to $45 in fees on a maximum $300 loan. This amounts to an interest rate of 460 percent, trapping some borrowers into a never-ending cycle of debt."
The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long. Using this kind of reasoning -- or lack of reasoning -- you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year. It is clever propaganda, but do people buy newspapers to be propagandized?"
53 Comments:
Payday lending does exist for a reason. Some people don't have access to credit, or banking services aren't readily available. But the existence of these problems does not mean payday borrowers should be exploited.
I understand there are differences between fees and interest, and in the original article, Mr. Sowell glosses over the explanation that fees cover the costs of running the business. Valid comparisons must be made, and we shouldn't hide behind nominal terms.
And it seems that Mr. Sowell does not understand the concepts of personal finance. When comparing interest rates, you don't just divide total interest paid by the principle. That formula doesn't take into account the length of the term of the loan. To compare rates, everyone uses the calculated annual percentage rate. That way, you can see which is more advantageous for the borrower. (For me, for example, borrowing $300 with my credit card is much cheaper, than using payday lending.)
You can use the APR to determine the interest of a short-term loan, which Mr. Sowell seems to ignore, with a stupid comparison to the $36,000/yr hotel room.
Oh dear! Could this story in the County Times continue to contribute to the myth of price gouging?
That's the way interest rates are always described. When your credit card says they charge 25% interest that means the rate you'd pay if you kept the loan for a whole year. Using terminology in a consistent way is an important part of clear communication. Why object to clear communication?
Many Payday loan stores offer unlimited extensions and renewels of loans. The APR of an extended loan could be as high as 651.79%. There should be a free market for these loans, but extending beyond two weeks gets expensive.
BTW, the Prime Rate is currently ~ 3.25%.
I think that the bigger and more important point is being missed here. The payday loan sector does not force anyone to take out the loans. It is a way for people who have no other means to get loans to have their needs met.
The high interest reflects the small size of the loan over which the transaction costs have to be added. The lender runs credit checks, process the forms in the same way for a $300 loan as for a $100,000 mortgage. A reasonable $40 transaction fee added to the interest charged makes the interest rate as calculated appear very unreasonable. Keep in mind that the transaction fees are not the entire problem here. Because of the low quality of borrower higher rates are necessary to offset the risks that are taken by the lenders. Many of the loans go bad and to offset those the borrowers who do wind up repaying the lender are charged higher fees.
The way I see it the loans are voluntary transactions between parties that know exactly what they are doing. I see no justification for the government meddling in the business because if the profits to lenders were high competition for those loans would soon lower prices until returns are more resonable.
vangelv: "parties that know exactly what they are doing" is a bit of a stretch...some of them cant even make change for a dollar...
RJS,
As Jon said above, " why object to clear communication?"....
Funny thing is, the credit card companies are far more confusing than the pay-day loan operations. You are told, upfront, what dollar amount you will be charged. Being able to make change for that dollar isn't even required to understand.
@ "VangelV": well said!
vangelv: "parties that know exactly what they are doing" is a bit of a stretch...some of them cant even make change for a dollar...
They are not stupid. If the bank offers the same loans for less they will go to the bank.
One other thing worth noting: Payday loan offices don't typically break the legs of defaulters or harm their families.
The same cannot be said for the only available alternative if the "do-gooders" get their way and shut this industry down.
"It is clever propaganda, but do people buy newspapers to be propagandized?"
Newspapers costs are paid for in large part by advertisements, so yes.
jon-
"That's the way interest rates are always described. When your credit card says they charge 25% interest that means the rate you'd pay if you kept the loan for a whole year"
that is completely untrue.
if you take out a bank loan for a mortgage or small business you pay origination fees.
these are most definitely NOT included in interest calculations, just as the ones on a payday loan ought not be.
you are comparing apples and oranges and calling it clear communication.
Sowell misses again in his attempt to defend the indefensible. Unlike salmon or hotel rooms, these loans are designed to rack up large amounts of debt - even if the terms are in the clear.
Washing it off as a "voluntary transaction" is like saying that cannibalism if OK if the person asked to be eaten. In both cases, it is still wrong, no matter how. Thankfully my state passed a law to kill the practice, much to the dismay of Sowell.
Unending debt and a trashed credit rating is far worse than the proverbial broken knees. Knees will recover faster than the credit rating, and you can always take out the loan shark.
Sethstorm,
"Washing it off as a "voluntary transaction" is like saying that cannibalism if OK if the person asked to be eaten."
You're insane.
This comment has been removed by the author.
Many of the loans go bad and to offset those the borrowers who do wind up repaying the lender are charged higher fees.
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Similar to medical insurance or social security, no? Some people pay more to offset losses on the others.
these are most definitely NOT included in interest calculations, just as the ones on a payday loan ought not be.
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I could be mistaken but it seems to me that on my last refi the full dislosure form did include a calculation that showed the interest rate if the fees were included.
This makes it easy to compare a loan with low inteest rate and high fees with one with low fees and a higher rate.
Whether it is right or wrong doesn't matter so much as whether it is done consistently, and people can undersand what it is they are getting.
For mortgages, the APR does in fact include up front fees. However, most borrowers, especially at the lower end are probably more concerned with monthly payments than with the APR. These payday loan co.'s seem to be providing a service otherwise unmet, and the borrowers no full and well what their obligations are when they borrow the money. The default rate is high on these loans so upfront fees and interest rates are high. So what? Isn't there an adage about "fools and their money"?
Payday loans are designed to trap low income borrowers living paycheck-to-paycheck.
Paying-off the loan in installments wouldn't trap those borrowers.
Paul said...
Not at all. I'm just illustrating how not-voluntary it is.
I notice several comments about comparisons with bank loans and loan origination fees.
Consider another angle: bank overdraft fees, which are essentially a fee to cover a short-term loan. If those fees were annualized, the payday loan industry would probably look great.
And consider how banks can handle overdraft checks of this size and written in this order: $2; $20; $200 and a beginning balance of $180. Cashed in order, the overdraft fees would be for 1 check. Cashed in reverse order, all three checks result in overdraft fees, and banks are allowed to do that.
The payday loan folks start to look very fair, in comparison.
"Sowell misses again in his attempt to defend the indefensible. Unlike salmon or hotel rooms, these loans are designed to rack up large amounts of debt - even if the terms are in the clear"...
Well as usual sethstorm you're wrong again but I know you are used to that...
So what's wrong with the idea that these payday loan companies are setup to make money?
No one is being forced to walk into the front door and do business with them...
Sowell misses again in his attempt to defend the indefensible. Unlike salmon or hotel rooms, these loans are designed to rack up large amounts of debt - even if the terms are in the clear.
Actually, you are talking about people who do not have the ability to get a loan but need one. Who are you to tell them what they need and why they must defer to you? After all, there is no evidence whatsoever that you can make a better decision for them than they can make on their own.
This is the problem with the left. They think that the people who are too stupid to do what is right in their own life are smart enough to vote for the right candidate who will rule over them.
Similar to medical insurance or social security, no? some people pay more to offset losse on the others.
Not at all. These people engage in voluntary transaction. Social security is not voluntary.
I could be mistaken but it seems to me that on my last refi the full dislosure form did include a calculation that showed the interest rate if the fees were included.
It does not matter. The fees are pretty much fixed. And while they may be very small in absolute terms when taking out the loan they are large in proportion to the loan. That is not the case when you have a big mortgage and a small fee.
Payday loans are designed to trap low income borrowers living paycheck-to-paycheck.
Nonsense. They are designed to meet a market need and generate an acceptable return on the risk taken.
Peak objects that such payday loans are "designed to trap low income borrowers living paycheck-to-paycheck" and there may be some truth in that, but that's not the issue, the issue is what do we do about it. If we simply criminalize the payday loans, we know they'll simply shift to the black market and hire knee-breakers to enforce the loans like Mike mentions. Lots of parallels to drugs here. If you think the profits are fat, you could start your own payday chain and compete with these supposed opportunists, yet magically that doesn't seem to happen in this market, despite open entry to new competitors. Could it be their rates are so high to account for higher default rates and inability to accurately gauge risk on these borrowers because of lack of info? Nah, couldn't be. ;) There is a final alternative, Peak and others can go out there and inform these borrowers that they have other options and should make better decisions so they can apply for traditional loans with better rates. Fat chance of that happening.
I have no doubt that there are sometimes questionable practices going on, just like with the credit card companies. But the "solutions" of those Sowell is arguing against are worse than the problem.
Not at all. These people engage in voluntary transaction. Social security is not voluntary.
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Except for the voluntary part the idea is the same, no?
Because of the low quality of saving for retirement higher rates are necessary to offset the risks that are taken by society. Many of those without savings go bad and to offset the risk others who do save have to pay more.
3760381a: "And it seems that Mr. Sowell does not understand the concepts of personal finance. "
I think Dr. Sowell understands perfectly.
What you don't understand, is that for someone with no money and no credit, the idea of a temporary loan of $300, even at a cost of $45 may be their only hope of continuing to keep a roof over their head, or get their car repaired so they can continue to get to work, or any number of other temporary emergencies you or I could handle more easily and cheaply.
They know they are paying a high price, but it is the only loan available to them.
When people rail against payday loans, and demand that such evil practices be stopped, they fail to realize that people in dire straits may have few other options except to go to lenders who charge even higher rates, and break kneecaps when loans aren't repaid on time.
juandos: "Oh dear! Could this story in the County Times continue to contribute to the myth of price gouging?"
Thanks for the link. That's a good one.
"Washing it off as a "voluntary transaction" is like saying that cannibalism if OK if the person asked to be eaten. "
Well, it is, isn't it? Anyone can refuse to eat or to be eaten. What could be more fair?
Hey Ron H glad to help on the link...
BTW if you've not seen it already there's another excellent Peter Robinson video interview with Thomas Sowell over at the Real Clear Politics site...
Dr. Sowell has a new book out (dude 81 years old and still working like crazy!) called the Thomas Sowell Reader...
Thomas Sowell: Spreading Around Wealth Causes Poverty
Reason.tv did a good video on payday lending a year ago, including an interview with a journalist who wrote a book against it. Of course, the $10k in credit card debt that he ran up was different because he wasn't buying HDTVs with it, unlike those rabble getting payday loans. Again, I'm sure there are abuses and some deeply ignorant borrowers, but simply shutting down the whole payday market because of that minority is just deeply stupid.
"So what's wrong with the idea that these payday loan companies are setup to make money?"
************
So making money makes it OK, do you support using child labor because it's setup to make money?
Is pimping a teenager OK because it's setup for the pimp to make money?
"So making money makes it OK, do you support using child labor because it's setup to make money?"...
Yes, how else do people acquire basic job skills?
I worked in farm fields when I was nine, it didn't kill me...
"Is pimping a teenager OK because it's setup for the pimp to make money?"...
Only if its your kid don culo...
Because of the low quality of saving for retirement higher rates are necessary to offset the risks that are taken by society. Many of those without savings go bad and to offset the risk others who do save have to pay more.
No. People take risks because the Keynesians at the Federal Reserve have declared war on fixed income people and savers. By pushing their aggregate demand argument they justify inflating the money supply to the point where savers are harmed so that reckless debtors can be saved from their own bad decisions. Eventually the savers give in and also pursue a path of recklessness. In the end most people wind up as large losers while some of us, who saw what was going on, got a lot richer without doing very much other than thinking clearly.
So making money makes it OK, do you support using child labor because it's setup to make money?
It helps if you can think rationally. In a world where you can't initiate violence the only way to make money is to satisfy a consumer demand better than your competitor. When you make money it is because the consumer voted for you instead of the other guy. So no, it is not a sin to make money in the market; it is a virtue.
Is pimping a teenager OK because it's setup for the pimp to make money?
If the person who is selling her body is capable of making the decision and there is no coercion involved then yes, it is OK.
juandos: "Dr. Sowell has a new book out (dude 81 years old and still working like crazy!) called the Thomas Sowell Reader...
Thomas Sowell: Spreading Around Wealth Causes Poverty"
Great interview! Sowell is a national treasure. I'll be picking up the book soon.
"Sowell is a national treasure"...
No doubt about it Ron H, absolutely none...
Don Culo, you asked those questions on the wrong blog, as many here have no problem with child labor or prostitution, including me. I was just talking to a friend a couple days ago and he was saying that he started working with his parents in the fields and in their store when he was 9 or so, in Europe in the '60s. Not full-time obviously, but when he got off school. He said that kids here need to work more- I guess he thinks they're too babied- and he made all three of his kids work with him, for his work on farms/ranches with animals, not easy work. As for the teenage prostitute, as long as he or she is old enough to make the decision and wants to do it, no problem.
Vange, this recent article exemplifies what you were talking about with "savers are harmed so that reckless debtors can be saved from their own bad decisions. Eventually the savers give in and also pursue a path of recklessness." That mises audio you linked to is pretty funny, the academic way the guy talks contrasting with his defense of what's considered to be the gutter, pimps. :)
So what's wrong with the idea that these payday loan companies are setup to make money?
Nothing if you only take that statement alone.
The problems start when you justify taking the customer to the cleaners with dishonest practices, as done by pay-day loans.
If your business model is derived from dishonest practices (as done by payday loans), it has no place.
No one is being forced to walk into the front door and do business with them...
The practicalities of their own situation do that for them.
"The problems start when you justify taking the customer to the cleaners with dishonest practices, as done by pay-day loans."
What dishonest practices are those?
Charging high fees isn't dishonest.
juandos: "No one is being forced to walk into the front door and do business with them..."
you: "The practicalities of their own situation do that for them."
Bullshit. Unlike you, many people take responsibility for themselves, and realize that the choices are theirs. Not everyone imagines themselves to be a helpless victim, like you do.
The problems start when you justify taking the customer to the cleaners with dishonest practices, as done by pay-day loans.
If your business model is derived from dishonest practices (as done by payday loans), it has no place.
There is nothing dishonest about meeting a demand for a segment of the market that does not get attention from the banks. The rates are not out of line once you adjust for the risks and for the cost of doing the credit checks and other paperwork.
If you think that the above statements are wrong than please provide evidence rather than opinion.
The practicalities of their own situation do that for them.
Correct. They are desperate for a loan to fix their car, buy something for the kids, take advantage of an opportunity, or whatever else moves them. Should they lose their jobs because they can't get a bank loan to fix the car? Should they pass on the opportunity to buy the kids a bedroom set for 75% less than the list price because they don't get paid until after the bankruptcy sale is over? Who the hell are you to tell people that you know what is best for them and that they are too stupid to make their own decisions?
What dishonest practices are those?
High fees to people least able to pay them back, as well as loans structured to fail. When these loans fail, they further trap these people by having the bank or bankruptcy as the only way out.
Should they ever get out of the hole, a payday loan is about their only option for subsequent financial issues.
"High fees to people least able to pay them back, as well as loans structured to fail. When these loans fail, they further trap these people by having the bank or bankruptcy as the only way out."
as I explained, there's nothing dishonest about charging high high fees. These are known up front, ands people can choose to accept the terms or walk away.
It's not clear how one structures a loan to fail. I could be wrong, but my understanding is that lenders like to be paid back, so they can collect those juicy fees. Why would they structure a loan to fail, whatever that means?
As always, you have a vivid imagination, and a poor understanding of the issues.
These are known up front, ands people can choose to accept the terms or walk away.
This shows your non-understanding of the issue, along with the baseless character assassination you're trying as well.
Thankfully the State of Ohio took my side of the argument instead of your side of the argument. They understood that there was no sense in defending the indefensible (the payday loan folks).
Thankfully the State of Ohio took my side of the argument instead of your side of the argument. They understood that there was no sense in defending the indefensible (the payday loan folks).
I guess that the mob's lobbyists did a fine job in getting rid of the competition. We will now see individuals who have no access to loans from the banks have to go to Fat Frankie or Johnny Two Times and pay the non-market rate. No wonder Ohio is dong so great.
High fees to people least able to pay them back, as well as loans structured to fail. When these loans fail, they further trap these people by having the bank or bankruptcy as the only way out.
Fees are not high. How much do you expect a credit check and the paperwork processing to cost? The reason why the cost is high as a percentage of the loan is because the loan is small.
As for loans structure to fail you miss the fact that the lenders lose money when loans are not paid back.
"Thankfully the State of Ohio took my side of the argument instead of your side of the argument. They understood that there was no sense in defending the indefensible (the payday loan folks)."
You and the State of Ohio agree that it's better for those in need of small temporary loans to be unable to get them, and therefore be evicted, or lose their jobs because they can't fix their car, or go without eating for several days before payday?
You and the state of Ohio must feel it's better for people who are desperate to go to "Vinnie" and his thugs for the money.
"This shows your non-understanding of the issue, along with the baseless character assassination you're trying as well."
It's not character assassination to call you an idiot, if you are in fact, an idiot.
V: "We will now see individuals who have no access to loans from the banks have to go to Fat Frankie or Johnny Two Times and pay the non-market rate. No wonder Ohio is dong so great."
I thought I had read that Fat Frankie met an untimely end. It's good to know he is still around. :)
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