Non-Profit Payday Loans: Loansharks With Shorter Teeth?

“I have almost $100 in savings,” said Ms. Truckey, who earns $9.50 an hour as a supermarket meat clerk. “I’m in a comfortable position for the first time in many years.”

That’s a lady who is finally digging herself out of a payday loan hole with the help of a “non-profit” payday loan. At one point, Truckey was paying $600 a month in finance charges alone. Now she has a new loan through GoodMoney, operated by local credit union. The new loan’s APR is only 252%, about half what she was paying before.

That’s still a pretty crappy number, and it begs the question, does it really cost that much to lend money? 12 states disagree and have usury laws that prohibit payday lending. There’s also an important book would-be payday debtors should read, called, “Don’t Buy Stuff You Can’t Afford.”

Nonprofit Payday Loans? Yes, to Mixed Reviews [NYT]

Comments

Edit Your Comment

  1. legerdemain says:

    252% – hopefully a typo. OTOH, if Ben is right (as he usually is) and if 252% is better than payday loans, then I need to start making payday loans.

    :)

  2. North of 49 says:

    banks/credit unions should seriously consider getting into the “small loans” business. with how payday loans are operating, they stand to make a mint.

  3. Tzepish says:

    I guess it’s not a typo – the linked article says she was paying the equivalent of 572% annual interest.

  4. Tzepish says:

    I should have read the whole article before posting the above, because it also says this: “At GoodMoney, for example, borrowers pay $9.90 for every $100 they borrow, which translates to an annual rate of 252 percent.”

  5. jrdnjstn78 says:

    That’s not a typo. Those “payday loans” are a huge rip. Then the loan is for only until you get paid then you are supposed to pay them back.

    I know credit unions have small loans. i belong to a credit union and the smallest amount the will loan is 200$. I don’t know the APR rate but it’s way under 252%.

    I feel bad for the people who are really trying and working hard and not screwing the system and then something happens and they have to use this service.

  6. mrjimbo19 says:

    I am frustrated by the fact that these people are being taken advantage of but I also see how they are making extremely poor lifestyle choices and getting in debt because of it.

    That article mentioned the family was first in trouble because they went into debt to see their daughter play basketball… if you don’t have the money to do something… don’t do it. Going into debt for the rest of your life is not a good answer. Of course they may not really care that much as good money or bad money looks the same in the wallet.

    I tend to think the only way to fix this is as the article seemed to vaguely recommend, education and credit management. Perhaps teaching a class like this during school math classes.

  7. FLConsumer says:

    Where’s all of those people who say credit unions can do no wrong? Here’s your sign.

  8. samurailynn says:

    @North of 49

    I know that Wells Fargo at least will allow you to borrow from your next paycheck if you have direct deposit. It came in handy a few years ago in an emergency. If I recall correctly, they charge something like $5.00 for every $100.00 borrowed, with a maximum borrowable amount. It was all right for me, since it was a one time emergency, but I can see how this sort of thing can really get people into trouble.

  9. SkyeBlue says:

    Loansharks? I think “Pirhanas” or even “Parasites” would be a more fitting description of these “PayDay loan” businesses.

  10. ChrisC1234 says:

    I actually think that the non-profit loan centers are helping these people out. If you read the article, it says that most people end up rolling the loans into new loans because they can’t pay them back. With the non-profit organization, you can only roll the loan into a new loan twice. After that, it gets rolled into an interest free loan (provided the client goes along with a mandatory credit counseling session). Also, the tellers who process the loans try to steer clients into long-term loans with a reasonable interest rate.

  11. timmus says:

    I’m sure a lot of people are using the loans for emergencies and to pay the electric bill, but I wonder how many of them are being used towards 22-inch rimz and bling.

  12. thepounder says:

    Unfortunately there’s a ton of PayDay Loan places around where I live, and they seem to absolutely thrive on the naïveté of younger Soldiers. Of course, personal responsibility should come in there at some point, as in do not buy something you don’t have the money on hand for.
    But these “businesses” are seemingly there only to rip people off who don’t really know any better… it’s just sad.

  13. gusgus says:

    On prosper (a peer-to-peer lending site) there is about a 44% default rate on High Risk credit grades. These are a subset of your typical payday loan customers

    If the lent to all the HR credit grades that applied, I am sure the default rate would be much higher.

  14. gusgus says:

    Ahh… no links? I would have shown the data.

  15. rodeobob says:

    Well, I read the article, and I’ve got mixed feelings…


    The bad stuff: The payday loan model is simply an amoral one that tends to create customer dependency on the product through coercion rather than quality.

    The good stuff: the Goodwill/nonprofit model is a lot like methadone. I wouldn’t recommend it to anyone who is in good health and has no addictions, but if you’re hooked on something, methadone is one of the better options. The rates are lower, and some of what would be diverted into profit is instead diverted into a savings account for the borrower, which leads them to use less & less ‘emergency lending’ measures.

    Do I think the Goodwill model should replace payday loans? No, I think usury laws should replace payday loans. But given the changes to bankruptcy laws in recent years, and the severe impact that Credit Counseling has on one’s credit score, the non-profit payday loan approach has the merits of weaning customers off of bad lending slowly and sustainably, without negatively impacting their credit.

  16. ShadowFalls says:

    I’ve been to banks that still offer loans as low as $1,000. For many, they tend to be looking for that small of an amount to get their car fixed, or some other issue that arises.

  17. shoegazer says:

    @rodeobob: well said.

    the non-profit payday loan approach has the merits of weaning customers off of bad lending slowly and sustainably, without negatively impacting their credit.

    Remember that the “microfinance” model which the UN and charitable organizations love, still lends small amounts at moderately high interest rates (20-24%), the main rationale being that these loans are being made to people with no access to mainstream credit. While 252% sounds excessive, it’s HALF of what she was paying before. The “roll over twice” rule means that she has to rein in her spending habits or be forced back into more expensive debt. And the “stay of execution” on her credit history may help her in the future.

  18. cliffb says:

    I agree with Rodeorob – its like methadone.

    One key fact that doesn’t seem to be paid attention to is this:
    “Of the $9.90 that GoodMoney charges per $100 borrowed, nearly half goes to writing off bad loans, Mr. Eiden said, and the rest to database service and administrative costs.”

    Sounds like they’re trying to keep these loans at break even. That other $4.45 for database service and administrative costs? I’m sure some of that is payroll. Unfortunately this model of lending is expensive on the cost of business side as well as on the consumer side.

    While this type of lending isn’t the greatest. I’d rather it be available legally this way instead of underground.

  19. aikoto says:

    Get screwed, but they don’t penetrate as deeply. Um, no.

  20. silverlining says:

    There’s also an important book would-be payday debtors should read, called, “Don’t Buy Stuff You Can’t Afford.”

    Yeah. Nobody needs rent, heat, groceries, AND their prescription medication. The nerve!

  21. vladthepaler says:

    Only 252%. You’d be better off with a loan shark.

  22. star_ says:

    Nobody is forced to take a payday loan. There are so many alternatives. I don’t see anyone as a victim in these circumstances, except for the payday loan companies who have to deal with a 20% default rate. That’s why the interest is so high. Otherwise it wouldn’t be worth it to be in biz.

    Why didn’t this couple take on extra jobs? Because they’re lazy that’s why. It’s so much easier to just go get another loan rather than put out some effort.

    I bet they both had their nights and weekends free to sit on their asses and watch tv or whatever while the debts piled up.

  23. Usermanual says:

    I can’t think of any situation I have ever been in during the course of my existance where I have been so hard-up I needed to borrow money at 252%. Payday loan companies are profiting from a segment in society that is either too lazy or too excluded to educate themselves on how incredibly harmful these types of “solutions” are.

    Are people really borrowing this money to aid in medical expenses and keeping their family fed for another week? I suppose in some cases it’s possible, but at what point does it set in that this practice is only going to make living beyond your means harder and harder as the interest continues to mount. I would like to see a study on how many people use this money for emergencies, and how many use it to buy lottery tickets.

  24. lmedsker says:

    Are you people seriously criticizing loans that are being offered by Goodwill at a LOSS? The article states that the Goodwill is offering loans at $9.90 per $100 for two weeks. For what it’s worth, payday lenders offer loans at $15.00 per $100 for two weeks. I’d challenge anyone who claims this is too expensive to start up their own loan business and offer loans at a cheaper rate. There is obviously a huge demand for $200-$500 loans in this country. Seems like if someone could offer loans for less than the payday lenders do, they would. That said…the Goodwill is offering the loans at a loss…and you still don’t think that’s cheap enough.

  25. FuzzyB says:

    There is a great deal of misunderstanding and incorrect information regarding payday loans and the people who use the product, most of it coming from people who have never used or needed a payday loan. First, since a payday loan is typically for 2 weeks, and most people don’t understand how the APR is calculated, using the APR (annual percentage rate) is very misleading.

    Simply put, the APR for a payday loan is presently calculated by taking the fee divided by the principle and multiplying it by the number of payment periods per year, then multiplying by 100 to get the percentage. For example, for a $200 payday loan with a fee of $30 for 14 days, the APR is calculated as follows:
    30 / 200 = .15 x (365 days per year / 14 day payment period) x 100 = 391.07 % APR

    Now take into account if other fees or payments were put into APR’s:
    A $1.50 ATM fee on $50 instead of going to the bank the next day
    1.50 / 50 = .03 x (365 days per year / 1 day payment period) x 100 = 1095% APR
    A $35 late fee on a $100 credit card payment for a payment that is 7 day late
    35 / 100 = .35 x (365 days per year / 7 day payment period) x 100 = 1825% APR
    A $24.00 bank overdraft fee on a $25 check until the direct deposit arrives in 5 days
    24 / 25 = .96 x (365 days per year / 5 day payment period) x 100 = 7008% APR

    Also, with all of the discussion about the supposed outrageous profits of payday loan companies, it is interesting that a non-profit company is only charging $5.10 less per $100 loaned and is still having trouble covering their expenses.

  26. humphrmi says:

    I smell a shill

  27. Yes I go with it “Dont buy stuffs which you cant afford”. This should be the tagline of all the payday lenders. If the consumers think that they can afford to repay on time then only they should apply for such a loan. Else it will be a big trouble for him or her….