Payday Loanshark’s Waters Drain

A proposed cap on payday loan percentages charged to members of the military is nearing final approval. The bill aims to limit the vigorish to 36%, down from the usual 350%. Great, how about the rest of us?

Payday loan centers high-interest short term loans as an “advance” on your workpay. For the financially naive, these can prove difficult to escape.

The bill is part of a broader package on military spending and, if passed in the House and Senate, proves cause for a thumbs up.

That’s assuming that the powerful loan shark industry is experiencing a shortage of bats in the DC area.

Bill Capping Payday Loans Nears Final Approval” [Emerald Coast] (Thanks to something_amazing!)

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  1. mustang says:

    I seem to remember something about a crack down on these types of services here in Canada a few months back. My understanding is that these places get around usury laws by charging several small usage fees to cash each check and a high percentage interest rate on the loan itself. If you do the math the total charge to turn your check into cash is often more than the value of the check itself. I guess that’s why check cashing places like this thrive in places where people are undereducated and live check-to-check.

  2. jgkelley says:

    I worked at the corporate office of a national payday loan organization for about a year, pulling electronic funds out of unpaying customers’ bank accounts. I sure felt like a winner. In most states for this organization there was NO interest charged, I believe in virginia there was a very small amount of interest added per day, but it never reached 350%. That amount is determined in an odd way — it assumes what the amount would be if a credit card company charged the same fees over a year, something like that. The actual amount was something like 20% charged on average. There were fees associated with check cashing that amounted to 5-10% of the check, but that was the necessary fee for the mass amounts of undocumented workers who could not cash their checks any other way, and small potatoes for the bigtime money launderers who cashed millions of dollars in checks over the years from large corporations under false pretenses/names.

    As far as payday loans went, there was an initial fee of up to $150 for the highest amount borrowable – $800 or so I think. That’s with no interest. The amount charged depended on the amount borrowed and the time period within which the loan was paid back, and most stores counted on their customers not paying back in time and adding an additional $10-100 to that first amount. This was in the company literature, actually–don’t only loan to people who will definitely be able to pay back. Loan to EVERYBODY. Cash EVERYONES’ checks. If they bounce, we just make more money in the end, etc.

  3. jgkelley says:

    And, to stay more on topic, lending to military personnel was somewhat discouraged, due to the difficulty of finding them when they left the area on duty, or the ship sailed. They were notoriously difficult to collect on.

    Score one for them, I suppose.

  4. RandomHookup says:

    Next stop should be the electronics stores outside every military base that charge okay base prices, but have some outrageous finance charges. Soldier fills out an allotment and the store gets paid till the troopie retires.

  5. VA_White says:

    Charging $150 to take out a loan and then saying the lender doesn’t charge interest is really kind of silly. The end result of many of these services is that the customer ends up paying 350% more than the original principal, regardless of what kind of curtain of fees you hide behind. This is the predatory practice the bill addresses.

    I am always dismayed at how many military members get into trouble with these payday loans because, at least in the Air Force, all personnel attend a mandatory financial education class as part of their first assignment to a base. They cannot claim total ignorance because these payday loan places and how they work are briefed in the classes. But airmen still get into trouble. You can tell people what to watch out for but you can’t force people to observe good financial practices in the space of one class.

    The long term solution is to incorporate financial literacy as an integral part of the school curriculum right along with math and reading.

  6. jgkelley says:

    I may be naive, but all obviousness of the evil incarnate that is predatory lending aside, I really do not understand how a $150 one-time fee equals 350% of a loan, unless that loan was actually for $25. The company I was employed with had, as far as business practices went, about as much moral fiber as an outhouse. But 350% added to any of their loans I never saw, and I saw a huge number of their accounts. If someone borrowed multiple times, which happened more often than not, then yes, the charges were for each loan, but the charges were still never over 25% of the amount borrowed. Again, I may misunderstand how the 350% of principal is being determined, but if you are considering 350% of, for example, $600, as $2275, that never ever happened. The most a $600 loan ever cost anyone was $900 or so, which I admit is ridiculous and absurd, but that person also kept the loan for upwards of 2 months, and considering that the cash advance from a credit card for most people with average credit is an initial charge of around 15-20%, plus interest charges, I’m not sure why the “350%” problem is what should be fixed by the gov’t. Again, speaking from experience with only one (albeit large) company. The problem is a lack of government sponsored low-interest loans, and of course unemployment/low wages.

    My point–these borrowers aren’t stupid or mathematically inept. They know how %’s and charges add up, they just don’t have very many choices. Mandating financial education classes is definitely a plus, but it seems entirely inadequate for addressing the problem.

  7. Trai_Dep says:

    A simple solution: mandate that servicemen (and women for the Annie Oakleys out there) MUST carry a sidearm whenever they’re on the loanshark premises. Anytime said servicemen feel taken advantage of, they get one free shot. Non-vital areas only. 5-second warning if they feel sporting.

    To avoid messy, multiple victim confrontations, they can only have a single round chambered. And no hitting fellow customers – that’s just RUDE.

    (perhaps, in a nod to our multicultural heritage, mandate that laborers have a machete strapped to their thighs?)

  8. RulesLawyer says:

    I’m torn. On one hand, predatory business like this that victimize people who are bad at math are pretty sleazy. Almost as sleazy as state-run lotteries, but I digress.

    On the other hand, this makes as much sense as the US Congress passing a law trying to shut down online poker. Thanks, nanny state, for protecting us from ourselves.

  9. Ben Popken says:

    Chill, 350% is a deliberate exaggeration.

  10. Sam Glover says:

    A $150 fee to take out an $800 loan is 19%. That fee is as good as interest, and would be considered interest under any usury law I am aware of. But that’s 19%/month. Or nearly 240%/year, as interest is normally stated. 350% isn’t much of an exaggeration, actually. I’ve seen worse.

    How do banks get away with this? Under federal law, banks are regulated by the law of the state in which they are incorporated. Guess why so many banks are incorporated in South Dakota. That’s right, no usury law.

    Payday lending would be illegal in every state with a usury law, and some states (NC is one example) have banned it entirely.

  11. Sam Glover says:

    jgkelley, you’re talking 20% per month. Interest is not stated in monthly terms. 20%/month would actually be 240%/year, as interest is normally stated.

    How do payday lenders get away with this? There is a federal law that says a bank is governed by the law of its state of incorporation. Guess why so many banks are incorporated in South Dakota. That’s right, no usury law!

  12. spanky says:

    Sam Glover, the only thing wrong with your reasoning is that these aren’t monthly loans. They’re almost always two weeks, so we’re talking about 580% in your example.

    350% is not an exaggeration at all. As the name implies, APR is calculated according to what a debtor pays annually, whether they actually accrue interest (as in a normal bank loan) or “fees,” as in the case of payday loans.

    Here’s an article that claims rates up to 1800% in Kentucky, for example:

    http://www.bankrate.com/brm/news/chk/19980217.asp

  13. amazon says:

    This might be a dumb question*, but:

    Can’t military employees get a payday advance through the gov’t?

    *federal employees in Canada can

  14. Trai_Dep says:

    Hey, Canadian Amazon -

    Welcome!

    Our current government has a steller, six-year history of mouthing words about loving our troops while sodomizing them with a Ben-Gay dipped broomsticks when they think the public isn’t paying attention.

    “Only” leaving them to the tender mercies of loan sharks is relatively kind to them, considering.

    PS: do amazons exist in the tundra? I’m having problems drawing a mental picture…

  15. spanky says:

    I tried to post this before, but it didn’t show up. It’s important, though, so I’ll give it another shot. (If it doesn’t show up again, I’ll just take it as a personal slight and sob quietly to myself. *sniff*)

    Anyway, the 350% APR is not an exaggeration. Remember, APR is annual percentage rate, not an absolute. So whether someone actually ends up paying the APR for a loan is irrelevant. What’s relevant is the total annual cost if they were to take a year to pay it off.

    One important thing that’s being missed here is that most payday loans are two weeks, not a month. So to take the 20% example, the APR on that would work out to 480% APR, not 240%.

    And that’s not even by far the worst I’ve heard of for payday loans. I’ve seen estimates that have shown some payday loan rates well over 1000%–although I expect most of those are a result of compounding (that is, the borrower is taking out increasingly larger loans to cover the fees, thus increasing the base amount of the loan as it’s rolled over).

  16. amazon says:

    trai_dep: to be honest, I’ve never been to the tundra. ;)

  17. So its a party time for military personnel. Anyway this should be imposed on more divisions of society like retired personnel, disabled people etc. this not only helpt these people but will also help the lenders as more and more people will start gaining faith in them ..