Payday Lenders Can't Afford To Lend You Money At Only 36%
The Leftwing Conspiracy blog scanned a cute pamphlet that a payday lender is distributing to try to drum up sympathy now that there's a rate cap on loans given out to military personnel. Boohoo!
From the brochure:
At 36% APR, the total fee charged on a $100, two-week advance would be $1.38. We cannot cover the cost of originating the a loan, let alone meet employee payroll and benefits and other fixed business expenses, at this rate.It's the hard-knock life, eh?
Don't Cry For The Loan Sharks [Leftwing Conspiracy] (Thanks, Hank!)
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Comments:
Are military personnel credit ratings so poor that they have to borrow at, or above 36%? A possible upside is that it may open eyes to the myriad better lending options than payday loans.
It is true. The lenders will end up making VERY little on short term loans if restricted to 36%. These aren't great risks to lend to at lower rates.
What makes this so sad is that, somehow, other lenders are able to cover origination costs, payroll, etc, at 7-10%. And comply with all the banking regulations. Makes me wonder...
It's just a shame only Military personnel get the mandatory APR cap, when they're probably not the ones who need to be looked out for.
@Tux the Penguin: Because those loans are much lower risk and in many cases secured in some way (items can be repossessed).
Jeez, what kind of rates are these places charging if they can't "do business" with a 36% cut?
$1.38 on $100? Does that even cover the cost of all the paperwork?? In order for someone to make minimum wage processing these things, they would have to do 6 an hour (and that doesn't count operating costs).
Fun with numbers:
The same interest rate can be reported as:
1) 36% (holy crap, 36% is insane)
or
2) 1.38% (not too shabby)
depending on whether you are talking about it as an annual percentage rate, or the amount of interestover the loaned amount for the period of the loan (1 to 2 weeks)
@castlecraver: Actually they are one of the largest segments of payday loan customers and thus do need to be protected.
@joeblevins: There's obviously some business model by which one can offer short-term loans at a reasonable rate -- credit cards do better at this than the payday loan industry, so talking about the cost of paperwork is a nonstarter.
To be sure, a credit card provides an ongoing line of credit rather than a standalone loan -- but I don't see any reason why such an ongoing line isn't an available option to the individuals targeted to this letter, given that they are, as a class, known to have an extremely stable employer.
Probably illegal to restrict access to them
@harshmellow
It's not a 36% cut, it's a 36% APR, which is calculated annually. When you break that down to a two-week loan, it works out to be far less.
Are payday lenders expensive? Sure, but since people use them, I would assume that they don't have an alternative - that their credit is too poor to use credit cards or bank loans, and that they really need the money if they are taking out the loan. And it beats borrowing from a guy who breaks your kneecaps if you don't pay.
74 cents a week per $100...
@Tux the Penguin: Those are long term loans. Payday loans are very short term loans. 36% over the course of a year is a lot, but it's practically nothing in terms of retail.
If you were going to go out on the street and let ANY random person who walks up to you borrow money, how much would YOU want to charge to cover your risk?
These services are in the business of trusting people who have proved themselves untrustworthy.
I personally wouldn't do it for 36%.
@Charles Duffy: People who use payday loans are too irresponsible to have credit cards. They are not a good risk at the credit card APR. They are a good risk at payday loan APR.
I guess my biggest issue is that so many people in the military have to use these to get by. "come on over here and put your life on the line for your country... no you won't make enough for your family but we will pay for your funeral"
all political issues aside (Iraq, Afghanistan, republican, democrat, etc) people in the military get payed very little, many of them in the lower ranks qualify for food assistance programs.
It's true that members of the military often make little money in terms of a paycheck. But there are benefits such as paid college education, lifetime healthcare, and pensions (if you stick it out for 20 years) that can add up mighty quick. Plus you get to shoot lots of guns and blow shit up. But knowing you get healthcare when you're 60 doesn't help much when you're taking home $200 a week at age 25.
there's a couple in my town who own a payday advance place, but apparently, when asked what they do, they say they're "in finance." they were making a metric f**k-ton of money, too, maybe due to the nearby military installation.
...they're probably not the ones who need to be looked out for.
I have to disagree.
Take a good look at the 2008 (MONTHLY) pay table. Keep in mind that half of the military is made up of enlisted personnel. (this would be the E-1 through E-9 portion of the table)
I think another big reason that these lenders prey on the military is their job security. Civilians that utilize these types of lenders are making minimum wage or so. People that need to take out short term loans are likely to be less responsible with things like keeping jobs and paying off debts. So, these predatory lenders see the military as a cash cow with legal recourse to collect (ratting to Uncle Sam) versus private civilian companies who would tell them to f off.
It makes sense - there are fixed costs associated with originating and administering a loan, aside from the percentage-based opportunity cost of not investing the money elsewhere. Maybe the best thing to do would be allow payday lenders to charge a fixed fee (set by regulation) for a payday loan coupled with a sane APR.
@stanfrombrooklyn: You're absolutely correct. They do get lots of benefits.
Of course, your average investment banker doesn't have to worry about 200lb IED's which create 5 foot deep craters in front of their hummer.
Just sayin...
@tk427: Just out of curiosity- do they pay the same taxes on those wages that us civillians do? IE, are those that are making 1200 a month losing 3-400 of that back to uncle sam?
I appreciate our military, but I don't think they're as poor as people make them out to be. Most military families that I have known who are claiming to be poor have the husband out in the military (most likely living in another country with a stipend for housing) and the wife is a stay at home mom with one or more children. Do you know what? If I quit my job, bought a house, and had a kid my husband would have a hard time supporting us too. The problem is that most families have to have two working parents in order to get by, but most military families expect that the woman should stay at home and not work.
@samurailynn: I think we are also seeing (thanks to recruiting problems) more single mothers in the military then ever before. Raising 1-2 kids on a single persons income is impossible regardless of career.
Im not going to get into it, but I think people (single or couples) who have kids at a young age before they have a stable income, then complain about benefits have no standing in my book.
@lowlight69: I'm in the military and get paid well. The problem is the snotty 17 and 18 year olds that blow their money every paycheck.
Yes and No. I am a military wife and he gets paid crap, but he gets housing and living expenses paid extra because he is married (yes, I think it's a joke). You also get more money for each kid (another joke). I work and actually make almost 3 times what he makes, instead of sitting on my ass doing nothing. OK, I sit on my ass all day, but at least I get paid for it.
You are right that it would be hard to support any family on 1 income. We could survive on it, but I wouldn't want to live that way. We would never have an luxury.
@bdgbill: Generally this is true but in the case of military members, not so much. My entry level IT job paid me almost double what my ex-husband made after 4 years in the Army. The single really kids depend on payday loans.
@dreamcatcher2: That's all well and good, but for disclosure purposes, application/origination fees are considered interest charges, and increase the APR in the REG Z box on a contract.
I'm not saying it's a bad idea, but it could be tough to police.
Improvise...Overcome...Adapt...
Maybe the military is doing these people a favor. If they can't get in the habit of taking out these unconscionably expensive loans,they will learn to budget,save their money and live their lives without being a slave to these payday lenders.If this avenue of short term credit is closed,they will have to presumably do something else.Hope that the "something else" is not worse than the original problem...
@samurailynn: The military wife doesn't work because her husband is PCSed every two years and so she can't hold a job if she has to quit and go job hunting every 24 months.
-ALSO-
APR is annual percentage rate. You know, I'm sure I've written this here before. A 36% APR means 36% a YEAR. But payday loans don't lend for a year. They lend for 14 days. So that's 36% / 365.25 * 14. So on a loan of $100, for 14 days, you can charge about .09856% per day, or about 1.38% total for the two week period.
So I loan you 100 dollars for two weeks at 36% APR? I am really lending you 100 and you pay me back $101.38. Great deal for you, huh?
If you and I agreed that I'd lend you $100 dollars and you'd pay me back $120 at the end of the two week period, that's a 521% APR. Seems outrageous. Except it's 20% on a $100 dollar loan for 14 days. And that means a 521% APR.
I was a military wife with two young children (4-6 at the time he enlisted) I always worked, and we always had to struggle with money. The military does not adjust (or at least it didn't when we were in it) for the economy of the area where you are stationed. You might have rent or a housing allowance, but you still have to buy all the other stuff. And lenders would prey on military because they knew they would get the money no matter what.
so there aren't enough non-military customers out there to support the biz? if they are already paying somebody to sit there on the clock, i would think it sounds like discrimination to refuse only military and their families.
@GothamGal: Are you sure you get extra money PER KID? There is with dependent and without dependent status. And a wife is a dependant. And it affects your BAH. Your BAS remains the same regardless of your dependent status. And you get TRICARE for your kids and spouse. And as far as I know, you have to pay for child care on a military base out-of-pocket. No stipend for that either. Hey. You made the claim. Please let us all know if the military really rewards you with extra money for each kid you have, per extra kid. Because I don't think they do. I think two married E-7s get the same amount of money each pay period despite how many kids they have.
I also think that base military pay is very low. BAH is adjustable depending on the part of the country you live in. It's meant to provide you with the same level of housing no matter where you go. So if your rank qualifies you for a two-bedroom flat, then you may get 400 a month in Alabama and 2000 a month in DC. Either way, adding BAH + BAH + base pay, depending on your part of the country = a living wage for your family.
NH just passed a law that capped all payday loans at 36%.
This is just one of the reasons why I love living in NH.
If the government thinks 36% APR is plenty for a PayDay loan, how about they pony up and offer PayDay loans for Military personnel.
Thay already are paying someone to watch out for their business. They're called legislators. The industry handed out $2.7 million in 2006 at the state level to influence state lawmakers. They couldn't buy off the pantagon because the military brass doesn't run for re election. hence- the (totally reasonable) cap...
@TheUncleBob: if military personnel need payday loans, they are in financial trouble, which means they can go to the Navy-Marine Corps Relief Society (at least Navy and Marine Corps personnel- the Army and AF have similar campaigns) and get interest free (or very low interest, depending on the situation) loans. Sometimes the military personnel don't even have to pay it back.
Ex-military here. Got out in '96. Money was crap, which is I why I got out. That's not to say that you couldn't live with the amount of money you were paid, just that the job opportunities at the time were soooo much better.
I never had to sell my plasma (lots do) or resort to pay day loans, or even go to the local bank where the draw was you got your paycheck a day earlier (still the same spacing between pay days, duh). I pawned a broken CD player once, and pretended I just needed a quick, temporary amount to cover me for a bit -- suckers!
I think you guys are missing a big point here.
When the government inserts itself into business practices by regulating, aside from those that are traditionally criminal, it will causes businesses to stop serving a given customer base that for whatever reason felt this was a useful service/product at a fair price.
Whether you agree or disagree with payday loans, or limits on APY's, or whatnot, the fact was that the free market decided there was a market here. Which means individuals were free to choose to use a given service, or buy a product, and felt it was worth what they were paying. Now, the government has put an artificial restiction that is in conflict with what the free market found to be acceptable. As a result, the businesses STOP functioning. You may think this is good if you disagree with a given business practice, but I do not. Mainly because it limits the freedom of two adults to enter into a legal contract.
Atlas Shrugged. It will happen more often if governments continue to overly regulate commerce. This hurts everyone in the long term. Same situation with anti-gouging laws in light of natural disasters. It disrupts the laws of supply and demand which causes quicker reactions and normalizations of supply flow if prices are allowed to move with demand and supply.
Yes, I know, most folks here will disagree with me. I'm just hoping to present a rational counter-point to the prevailing viewpoint that most companies are bad and consumers need the government to protect them from their own decisions.
How is a military salary not enough to get by on? For a single parent, maybe, but for the spouse not to work? That's just selfish.
I have been in the Marine Corps for 13 years and used to deal with predatory lenders regulary when they would call the command looking to collect. The reasons why servicemembers go there are many but are mostly related to living beyond their means.The organizations like Navy/Marine Corps relief will not pay for rims, car stereos and paint jobs.The lenders know that when that service member goes to them that he has job stability and that they can call his command and force him to pay them back or he will face charges. As far as military members not making much money in the first few years of their careers they don't but you won't find that in most entry level jobs either. As you move up in rank and time the pay increases accordingly.
Incredible.