Research shows that, despite charging high interest rates, payday lenders don’t make much money than typical businesses. [Credit Slips]

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  1. B says:

    Does this imply the high interest rates are justified? And, as payday lenders typically loan money to people on the fringes of society, a high number of defaulted loans is to be expected.

  2. Crymson_77 says:

    @B: I would say that the high defaults are the reason for them not making a lot of money. It is a small segment business and the whole idea behind it is to be predatory. Personally, I could do without the stress of running a business whose whole goal is to screw people…

  3. CRNewsom says:

    I don’t know where you guys are, but near my former employer (read: the fringes of society), there were more payday loan places than New York has Starbucks. Maybe the market is simply oversaturated. Three or four could do well, but not everyone will turn a decent profit if there are 20-30.

    /I don’t agree with payday loans, especially since my mainstream bank started allowing them on checking accounts. It just screams shady to me.

  4. RogerDucky says:

    @Crymson_77: But, the reason they don’t make money makes their rates justified.

    Look at it this way:
    If they lend $1 to 10 people, 1 of which pays them back, then they would have to ensure that 1 person pays at least $10 in order to break even. Of course, that would mean a interest rate of at least 1000% for that 1 person, which definitely looks predatory to any sane person. Still, it’d be the only way for them to stay in business.

    Whether or not such a service is even useful to that 1 person, though, is up for debate.

  5. Virginia Consumer says:

    The payday loan interest rate calculation is a biased measure anyway. They are mostly charging a fee that when given the small amounts they lend out and the short term nature of the loan results in a “high” interest rate. So if I lend out $200 and change a $10 fee for that service that doesn’t seem to bad, however, if I demand repayment in 30 days then (and I really simplified the math here) that works out to an annual interest rate of 60%. Now that is really not an interest rate it is just a fee. Just like the “Fee” I paid when I bought my house, or the “Fee” I paid when I financed my car or the annual “Fee” on my credit card.

    So are they making money, sure, $10.00 at a time. That $10.00 is still a lot less than a typical bounced check fee or over-draft fee. It is also less than most late payments amounts I have seen.

    Remember it is all in the math and I can make the math “say” anything I want if it suits my purpose.

    This doesn’t mean they are not offering a predatory service. But they are a business offering a service that people are apparently more than willing to pay for. Does this make them any less evil than McDonalds because they sell grossly unhealthy food to a generally unhealthy consumer?

  6. Mr. Gunn says:

    Well, duh! Shouldn’t everybody now know subprime loans don’t really make that much money? Does anyone know the source of the study that showed that in the absence of payday loans (in the states where they don’t have them), that the poor tended to be even worse off as they did things like bounce checks instead of take out payday loans.

  7. Crymson_77 says:

    @RogerDucky: That’s just the thing…they shouldn’t be lending to these people in the first place. This is the main reason that debt collectors are so prevalent and may be why they all have such a bad attitude…

  8. galatae says:

    @Mr. Gunn: You can go to [www.cfsa.net] to get copies of all the favorable research. It’s the industry’s trade association, so it’s a little tilted.

    They list at least two recent ones:

    “Federal Reserve Bank of New York Staff Report Finds Consumers Fare Worse under Payday Loan Bans”
    and
    “Survey by University of North Carolina Finds Consumers Face Costly Short-term Credit Choices Since Payday Loans Exited the State”

  9. bobpence says:

    Presumably lower rates would decrease defaults. Perhaps there is a payday loan analog to the Laffer Curve whereby lowering tax rates increases revenue (within a range; 0% tax rates tend not to pay). If I were a payday lender, I would test a much lower rate in an isolated market area. Which would be a good alternative to the other thing I’d want to do with a noose if I were a payday lender, scum of the earth barely even with collection agent.

  10. Mr. Mangold says:

    “That’s just the thing…they shouldn’t be lending to these people in the first place. “

    Yeah how dare they force these people to come in and take payday loans. A basic economics course will tell you that as risk rises so must return. The lenders giving out these loans know that the risk of never seeing a dime back is very high, and therefore so are the interest rates.

    The people taking the loans are the problem, not the lenders. They are delivering a service that obviously a significant segment of our population wants provided. An interesting study would be what % of payday loan customers have checking accounts. Because anyone who is receiving a paycheck on a regular basis and doesn’t have even a basic free checking account is a complete moron.

  11. notallcompaniesareevil says:

    But wait, I thought they were evil? I applaud the Consumerist for posting stories like this. It demonstrates a welcome degree of editorial integrity and a noble attempt to be fair and balanced (in the real sense of the phrase, not the foxified one). Thanks.