New Hampshire will become the latest state to keep payday lenders from gouging their patrons. A measure passed by the legislature will cap interest rates on payday loans at 36%, a drastic change for an industry used to bludgeoning underbanked consumers with interest rates exceeding 500%. Payday borrowers spend an average of $793 trying to repay a $325 loan. Let’s see how the economic leeches spin this as a loss for consumers.
The state’s largest payday lender, Advance America, claims the bill would either force them to close shop or accept losses of $100,000 per storefront. They are “very concerned” for the future of the 200 employees statewide who make their living cheating hard-working consumers.
…others argued that payday loans are an option that consumers need; without them, they said, people could be driven to less-savory choices, may depend more on their towns’ welfare departments or have to scrimp on necessities. Other options facing someone who’s broke – such as bouncing a check – are much more costly than a title loan, they said.Sen. Bob Clegg recounted times of struggle in the 1970s and 1980s when he had to turn to the “black market” to tide him over. “You can fail, or you can take another chance,” said Clegg, a Hudson Republican. “My position, I took another chance.”
He would be too embarrassed to go to a welfare office, he said, and would rather “stand tall, make my deal with them and then make my payments because that keeps me a man.”
Yes Senator, consumers should smile and stand tall as they take their financial raping like real men. Anything to stay away from the dreaded social safety net.
Payday loan limits passed [Concord Monitor]
PREVIOUSLY: Payday Lenders Can’t Afford To Lend You Money At Only 36%
(Photo: taberandrew)
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Payday lending, now they can tackle ”fees” for keeping your item. That’s the way payday lenders in our city overrode the 60% max that they can charge in interest. Once you add fees, we’re back to 600%.
@dkush21: “ONLY 36% interest! Legalized loan sharking anyone!!!!”
Loan APR Period Cost
$500 036% 14 Days $6.90
$500 100% 14 Days $19.16
$500 150% 14 Days $28.75
$500 200% 14 Days $38.33
$500 250% 14 Days $47.91
$500 300% 14 Days $57.49
$500 350% 14 Days $67.08
$500 400% 14 Days $76.66
$500 450% 14 Days $86.24
$500 500% 14 Days $95.82
You know, I don’t think it’s loan sharking if you loan somebody with piss-poor credit $500 dollars for two weeks and you only charge them $6.90. I think it’s bad business, for you.
Really, what is a good amount to charge somebody for a loan over two weeks? Anybody care to venture a guess? Make sure you calculate in the cost of renting a store front; pay for your employees; interest you will owe on the money you borrow so you can lend to the lowest rung of society; “risk,” because you’re loaning money to people that don’t have enough money to live for the next two weeks without a $500 dollar loan; and “profit.”
No bank loans these people money, so without payday lenders they have no option. But if they did have a bank, they’d get charged $36 dollars for overdrafting by 10 cents.
Laws don’t need to change the APR. Laws need to change the policies for what happens when you default on the loans. Maybe the interest isn’t compounded if you default for an additional two weeks, for instance.
@XianZomby: I’d have to agree. Every time you create a new law, you take away just a little bit more of our freedom. I’m not an expert, but if I had to guess, I imagine that the majority of the people who turn to these places are the ones with shitty credit to begin with. You know what that tells me? If they had better credit (meaning they handled their finances responsibly in the past), they’d be able to get a loan at a much better rate. Even the extreme of taking a cash advance against a credit card is cheaper than these places. So with that being said, if these places want to take the risk of lending money to those who are of a higher risk of not repaying their obligations, then by all means let them. I see it as a hard (and expensive) lesson learned to all those who have bad credit… pay your bills on time, fulfill your obligations, and manage your finances wisely… so if/when bad luck befalls you and you need that little extra cash, you have better options to choose from.
@XianZomby: i think you forgot to carry your decimal point or something.
from [ago.mo.gov]
How much interest will a payday loan cost you?
Loan fee
$ 15.50 per $100 (nat’l average)
Amount borrowed for each loan
$ 500
Loan term
14 days
Number of loans (including renewals) you expect to have in a year: 1
Amount you will pay in fees per year:
$ 77.50
Effective APR on loan:
403.00 %
ummm…
“If I want to drive a motorcycle without a helmet – then that is my business.
If I want to be in a car without a seatbelt – then that is my business.”
yeah, until you get in an accident and wind up in the hospital and then the rest of us have to 1) pay higher insurance premiums or 2) pay higher taxes – since the hospitals get medicare and medicaid $$$ to stay in the black
if you don’t want the gov’t on your back about seatbelts, then either pay ten times what you do now for health/car insurance or put a 12-inch metal spike on the center of the steering wheel so the rest of use don’t pick up the tab for your comatose @$$
@yesteryear: Even though studies have shown that people who live healthier (i.e. don’t smoke, stay in shape, etc.) cost MORE money than anyone else? Over time, we as a people would pay more if everybody was healthy as opposed to everyone was unhealthy. Not only because of the increased lifespan – meaning we pay more over time – but also because things like cancer, strokes, and random diseases would still afflict us. So it’s doubly bad.
Let me do whatever the fuck I want to myself. The government doesn’t own me. “Life, liberty, and the pursuit of happiness”… guess we’re leaving out the liberty and pursuit from now on.
@yesteryear: I didn’t forget to carry a decimal point. In fact, your example of a $77.50 fee on a $500 dollar loan for 14 days matches up with what I listed: 400%. You offered loan fee and then calculated the equivilent APR. I offered APR and calculated what you called the loan fee.
For a 14 day loan at 500% APR, you do this:
500 (the APR) / 365.25 (days in the year) * 14 (days of the loan) = 19.164%
So for a 500% APR loan, that 19.164% of the loan equals the fee.
Work it the other way:
$15.50 per 100 dollars? That’s 15.50% over 14 days, or divide that by 14 to get 1.107% per day. Then multiply the per day percent by 365.25 and get an APR of 404.38%
When people say “500%”!!!! They don’t get that’s an APR. And they still think 36% is high. But you’ll go broke loaning people money at 36% APR, because you have to pay people to do paperwork to set that up. And you make like .0985% per day on a loan at 36% APR. That’s not worth it for a business. For a 14 day loan, that’s like a $1.37 per 100 dollars. You can’t run a business loaning people money at that rate.
Oh, and the real problem with payday loans is that if you need $500 dollars now, and you don’t have it, it’s because you have zero savings and spend your entire paycheck (presumably) on buying food and rent and other expenses. So the likleyhood that come next paycheck you’re going to have a surplus of $500 is almost nil. Payday lenders count on this, because they want you to default on your loan so they can compound the intrest and you end up having to pay back $2000 on a loan of $500. The “exorbant” APR is not the problem, it’s the compounding of the interest and the fact that people that need an emergency $500 or $600 and dont’ have that buffer built in already cannot expect to have surplus cash the next paycheck to pay off what they borrowed.
@snoop-blog: “…when i had to leave town for an emergency and needed about $200 more than what i had. it costed about $230 to pay back so i paid them about $30 for a $200 loan for 21 days. not sure what interest rates were or anything like that…”
That’s around 260% APR.
Now, to play devil’s advocate for a second, here:
If someone wants to take out a payday loan and pay such a large interest rate, why do we feel the need to step in and stop them? Granted, the “lenders” may be taking advantage of people, but they’re not misleading or deceptive. And more importantly, they’re not long-term and have little potential to hurt anyone besides the person taking the loan.
If you have a sub-prime mortgage, you are contractually obligated to pay it off for XX years, and if you don’t, you are walking away from potentially hundreds of thousands of dollars worth of debt that the bank must take on, which then affects everyone else who either has a loan or is trying to get a loan.
With a payday loan, you may be locking yourself into a cycle of debt, but the amount is tiny in comparison, and the sphere of influence relatively small.
So why do we feel the need to police this?
Back to reality for a second: my fiancee was in this trap when we met. Payday loans every paycheck, and a constant barrage of overdraft charges. She was already in a not-great financial situation due to about 100,000 in student loans, and this exacerbated the situation to almost the breaking point. At the end of the first year we met, she had spent almost 15% of her post-tax income on overdraft fees and payday loan charges.
I really resent the payday loan companies and her bank for taking advantage of her, but at the same time, I still wonder in the back of my head; were those sources of funds unavailable, what would she have done?
They really are not “one-time” loans, as the lenders tout them to be. They end up becoming a way of life, a “cushion” for people unable to secure money through other means. They end up serving the same end as a credit card: enabling people to live beyond their means and charging them for it.
I think the only thing I am happy about in the whole ordeal is that at least she was forced to pay off the “balance” every two weeks, rather than racking up an obscenely high, high interest credit card debt.
And despite my libertarian leanings and my devil’s advocate post prior to this one, I am happy to see them gone.
@snoop-blog:
Sure they could. Want a helmet law waiver? Sign a form, get a special endorsement on your license, and a code on the license plate of your bike. Crash in the road, ambulance comes by, sees the plate of your bike, leaves you there.
@Hambriq:
How did your fiancee end up with $100k in student loans? Hopefully, it was for something that would generate the funds to pay it off. Unless she was going the law/medicine/quality MBA route, that seems an insane financial decision.
What I don’t understand is why people who take out payday loans don’t use the pawn shop instead? Oh wait, most of the crap they have that’s worth anything is owned by the rent-to-own place.
Seriously though, these folks have made their own bed, now they have to sleep in it. Though I do hate the proliferation of Check n go and cash advance places here in my city.
ok. i think i’ve read thru enough of the arguments on both sides regarding payday loans over the past year to formulate a middle-ground that both sides could agree with.
what if we let the payday lenders continue their ways, but we add a cap – not in interest rate, but in what can be repaid. what if the laws were written in such a way that capped my interest on payback of the loan to say 3x the original loan amount. i borrow $500, you charge your 500% APR, but legally you have no recourse to collect any more than $1500 in interest & fees plus the original $500. the loan is satisfied either when i pay you back in full or reach the cap.
attempting to collect on the debt past the cap would result in stiff penalties to ensure compliance.
@JustAGuy2: Of course you’d also promise not to sue the person that hits you, right? Even if was their fault? Or are we going to have to try to figure out if you would have been hurt if you wore a helmet. That’s what’s so complicated about many of these laws. As many have mentioned, you behaviors do impact others.
@JustAGuy2: Four years at a $40k/year Boston school. It racks up pretty quick.
Here’s the thing that most people don’t understand – as evil as 500% interest sounds, these places serve a purpose for the lower income community. No legitimate bank would ever be bothered with a loan for a few hundred dollars, as consumer loans usually cost the same to process, regardless of their size. These payday loan and pawn shop places appear to charge substantial interest rates because it is a relatively small amount of money borrowed over a relatively short time. But at the end of the day, these payday loan places bank the dollars they take in, not percentages (and the people pay dollars, not percentages). Think of it like a taxicab analogy…the dollars charged per mile to take a taxicab across town is far higher than the typical airline ticket for a flight across the country. You wouldn’t take a cab across the country, you wouldn’t take an airplane across town. Dollars charged per mile for a taxicab is very high, yet there are fewer miles involved so the sum of money you pay is not that high. Same story with these payday loan places – nobody would use them to borrow tens or hundreds of thousands of dollars over 30 years and nobody uses a traditional bank to borrow a few hundred dollars for a month or less. 36% would yield too small an amount of dollars for these places to be profitable. Now that the state has effectively shut them down, the low income community has even fewer borrowing options. At then end of the day that means the low income community in NH will end up paying even more to borrow money. Smart move, New Hampshire!
The Senator was either flying cross country with balloons stuffed in his ass or was a fluffer on porn sets.
That’s pretty much all I know about illegal/immoral activities in the 70′s and 80′s.
Subjectively I share the moral indignation over payday loan interest rates, but aside from the libertarian argument, here’s the problem from a free-market perspective —
Payday lenders are not operating a cartel where they can conspire to fix the interest rates artificially high. They are in competition with each other and thus have an incentive to make loans as cheaply as they can while still turning a reasonable profit.
So if payday loan interest rates are shockingly high, it’s because they have to be in order to make it worthwhile for lenders to tolerate the shockingly high default rates on those loans.
Government price caps follow a familiar pattern: they feel good in the short term, but long term, they just drive vendors out of the market and leave buyers underserved.
Give the power back to the banks and credit card companies! They have the consumers’ interest at heart, right?!?
@yesteryear: exactly. not to mention the fact that payday lenders are now co-optings people’s SS and disability checks, aka our tax dollars, as repayment for these horrific loans. They are literally making millions off of my tax dollars. [online.wsj.com]
Ppl that get payday loans are making a stupid decision, but often they are very low-income and more likely to rely on social services. I see these regulations as protecting me more than the people who actually get the loans, but it protects them too. Everyone wins except for the payday lenders and their stockholders.
Yeah! Go New Hampshire! No sales tax and now no ripoff payday loans.
@ARP:
Exactly. You want to not wear a helmet? Fine, you accept 100% responsibility for that decision, since there’s no way to determine, in an emergency medical situation, whose fault it is.