Payday lending: Part 1, doing well by doing good?
When the shades of night are falling,
Comes a fellow ev’ryone knows,
Housing and finance are inextricably linked:
One is human, one is robotic
Just as secure tenure is critical to establishing a viable family, so is access to inexpensive credit critical to developing house-buying power. What happens when someone falls behind the savings-borrowing eight ball is movingly documented in a New York Times article from a few weeks back:
But money is scarce and so are presents. “It’s all right,” he said, “they know I love them.”
Mr. Milford is chronically broke because each month, in what he calls “my ritual,” he travels 30 miles to
Some years back, Nancy and I vacationed through the Four Corners area, and spent a little time inside the Navajo Reservation, whose border-town outpost is
Homes on the Navajo Reservation
Mr. Milford, who is 59 and receives a civil service pension and veteran’s disability benefits, doles out some $1,500 monthly to the lenders just to cover the interest on what he had intended several years ago to be short-term “payday loans.”
Emerging from the reservation into
It’s the old dope peddler,
Spreading joy wherever he goes.
Obviously there is a market, so the credit companies are serving a need. Are they also creating that need? Are they, in short, credit pushers?
Mr. Milford said he had stopped taking out new loans, but many other residents of the
What James Hadley Chase thought of Fast Bucks
While such lending is effectively banned in 11 states, including
Why are they mushrooming? Because, whatever else these payday loans may be, they are customer-friendly:
The loans are quick and easy. Customers are usually required to leave a predated personal check that the lender can cash on the next payday, two or four weeks later. They must show a pay stub or proof of regular income, like Social Security, but there is no credit check, which leads to some defaults but, more often, continued extension of the loan, with repeated fees.
Provide one of these, you’re halfway to your loan
The essence of lending: credit history (payroll stub) and collateral (postdated check). Simplifying credit decision-making to its essentials. Who you are in the future is who you have been in the past.
Ev’ry evening you will find him,
Around our neighborhood.
It’s the old dope peddler
Doing well by doing good.
The lenders’ interest is in the very simple question: can we get our loan repaid? By taking a postdated check, the lender jumps the payment queue, assuring itself Mr. Milford pays his loan first, leaving his Christmas presents for last.
In many states, including
Who takes out a two-week loan? People who have difficulty envisioning the future. People living from paycheck to paycheck. People who lack financial literacy or the habit of saving. Such people are vulnerable:
In September, Congress, responding to complaints that military personnel were the targets of “predatory lenders,” imposed a limit of 36% annual interest on loans to military families.
Anyone who’s ever visited a major domestic military post knows the front gate is near when you pass, in some kind of order, the tattoo parlor, video store, gun shop, military surplus store, and pawn shop.
Downtown
Military families, under all kinds of stress — tension, family separation, anxiety — make a ready supply of customers.
The law will take effect next October and is expected to choke off payday lending to this group because, lenders say, the fees they could charge for a two-week loan would be negligible, little more than 10 cents per day, said Don Gayhardt, president of the Dollar Financial Corporation, which owns [and franchises; Ed.] a national chain of lenders called Money Marts.
A Money Mart (from DFC’s Web site)
Protecting the troops’ wallets is a good idea, but might it kill an essential source of credit?
The new law will have little impact on the larger practice because military families account for only a tiny share of payday lending, which lenders defend as meeting a need of low-income workers.
Dollar Financial Group’s customers are individuals and families who require basic financial services and are under served by traditional retail banking networks. Dollar Financial Group services include check cashing, short-term loans,
There’s meeting a need, there’s helping solve a chronic problem, and there’s enabling the problem. Pure market economics tends to draw no distinction among these motives.
Mr. Gayhardt said the industry had prospered because more people worked in modestly paying service-sector jobs, and in a pinch they found payday loans cheaper and more convenient than bouncing checks, paying late fees on credit cards or having their utilities cut off.
As I posted before, the credit conundrum is cruel: those who live closest to the edge, and therefore most need financial relief, are likely to be charged the highest risk premium.
Mr. Gayhardt, who is also a board member of the Community Financial Services Association of America, a trade group that represents about 60% of payday lenders, said the frequency of extended rollovers and huge payments was exaggerated by critics.
From the CFSAA’s Web site: sitting at home, on my laptop, getting my payday loan, and happy!
He said the association supported “fair regulations,” including a cap on two-week fees in the range of $15 to $17 per $100, a level now mandated in several states, including Florida, Illinois and Minnesota. This translates into effective fees of about a dollar a day for those who repay on time, which he said was reasonable given the risks and costs of business.
As a corollary to the basic conundrum, we have the feature that small loans are proportionately more expensive, measured in interest rate, because the unit cost to handle even the most basic credit transactions cannot be squeezed below some amount, and when applied to a very small, very short term, loan, it converts into a high and potentially usurious rate.
“We want to treat customers well so they’ll come back,” Mr. Gayhardt said in a telephone interview from his headquarters near
Want a free sample?
He gives the kids free samples,
Because he knows full well
Even as we take Mr. Gayhardt at his word, his industry may be hostage to its bad apples, those who have no interest in helping customers and who use forthright souls like Mr. Gayhardt as publicity shields.
How do we distinguish the responsible lender from the loan shark?
A loan shark and her hard boys (from a Thai affordable-lending television commercial)
[Continued tomorrow in Part 2.]
