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Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

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Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#61

Post by Bartweiss »

telchar wrote: post #9
jstanley wrote: post #5

Earlier quoted context omitted.

Payday lenders aren't making 20+% for free. The interest rate is high because the risk is high. In the absence of regulations on interest rates, competition hammers the interest rate down to the lowest it can be before some other venture can provide superior returns.

You're assuming perfect information in the market. The GP's point is that if there's trickery involved then that assumption doesn't hold. It's not hard to make a hefty profit in excess of risk pricing if you're conning a revolving set of desperate people.

> It's not hard to make a hefty profit in excess of risk pricing if you're conning a revolving set of desperate people.

I don't think this is true, at least for payday lending. People seem to be trying quite hard and failing to make hefty profits.

Payday lenders apparently run a pre-tax profit margin below 10%, while consumer financial services in general are around 30%. Real estate and vehicle leasing are also up around 15%, so there's plenty of money in lending people valuable things. (Sub-10% is not a low profit margin, broadly, and it's hard to find any more detail. But industries without significant unit costs often run at or above 10%.)

About 20% of opex for payday lenders is apparently defaults; that "revolving set of people" point is quite true, but it also means lenders have badly incomplete information about their transactions. I don't mean to be glib, but it turns out that it's pretty hard to turn a profit when your business involves giving money to strangers without collateral. Realistically, I'd expect much higher profits for shady tax preparers and other people who can load all the risk of imperfect information onto their customers.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#62

Post by 1123581321 »

dvtrn wrote: post #60
1123581321 wrote: post #59

Earlier quoted context omitted.

I used to work for a credit union that had a branch in a very troubled low income area. We worked really hard to get people to consider us as a cheaper, more transparent and ethical alternative to payday lending. So I know a lot about it as competition. Nowhere I’ve said it’s not exploitative. However, exploitative doesn’t mean that a high interest rate is extremely profitable as is popularly believed. To clarify, pa…

Okay, then You can extrapolate 400% from this example. Consider me obscenely interested in understanding the math to break down measuring risk such that you end up with 400% annualized interest on a, say $1000 loan. Again, even traditional banks don't hit applicants with poor credit this hard. Personally, I paid off a personal loan with my credit union down in Texas, only financial institution that would give me one…

Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though.

Edit: in response to your edits, I think your credit union example is a good one. That is exactly why credit unions are valuable; they have a local/regional reach similar to payday, but they are cheaper, and they will lend to people that Bank of America, Chase, etc. won’t touch.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#63

Post by tjansen »

mikeash wrote: post #33
tjansen wrote: post #21

Earlier quoted context omitted.

Because compliance with regulation requires additional work and thus costs money. As every payday lender has to do this, they will raise their fees.

Obvious counterpoint: regulations which cap fees below the current level.

That's not the kind regulation the article is mentioning. But generally, the effect of limiting the fees in a working market (and there is no indication here that the market isn't working in this particular segment) would be that it either has no effect, if the fees are already lower, or it de-facto outlaws payday loans.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#64

Post by astura »

1123581321 wrote: post #35
robert_foss wrote: post #16

Earlier quoted context omitted.

If the 'invisible hand of the market' was indeed working, why are such obscene rates common? In my mind it's profiteering on the backs of impoverished people.

Do you think there is a level of default risk that justifies a higher interest rate?

Higher interest rates, sure, but at some point it moves from "providing a needed service" to intentionally predatory.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#65

Post by mbostleman »

jadell wrote: post #53
mbostleman wrote: post #43

Earlier quoted context omitted.

The overhead of regulation is not my concern. My concern is the detrimental effect on society that comes from trying to manage companies doing things that "have a detrimental effect on society". To me, payday loans are a symptom, not a cause. An inability to manage money is not going to go away if payday loans are stopped. An inability to manage money may in some cases be improved with education and mentoring which w…

Teaching people to manage money used to be the purpose of classes like "home economics" in US public schools. Over the past 40ish years, home ec (and civics) have been systematically pared down and removed from public school curricula across the country. When I took the classes in the late 90s, it was basically "learn how to bake this one thing and hand sew a ripped cloth." A few years later when my sister was in hig…

A focus in public education would certainly be helpful. So would any number of private initiatives. I think like many bad behaviors there can be a cycle that repeats as it is passed down from parents to children. Whether it's abuse, drug use, gangs, or managing money - breaking that cycle is the key. Individuals break out all the time, but it seems like that's the exception. And when it does happen, it seems like someone or some group reached out to that individual to provide exposure to other behaviors that have obviously better outcomes. That's the kind of approach that needs to be exploited imo.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#67

Post by pnutjam »

1123581321 wrote: post #62
dvtrn wrote: post #60

Earlier quoted context omitted.

Okay, then You can extrapolate 400% from this example. Consider me obscenely interested in understanding the math to break down measuring risk such that you end up with 400% annualized interest on a, say $1000 loan. Again, even traditional banks don't hit applicants with poor credit this hard. Personally, I paid off a personal loan with my credit union down in Texas, only financial institution that would give me one…

Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though. Edit: in response to your edits, I think your credit union…

In my experience, credit unions have stricter lending rules. Mine does offer an overdraft protection, which is essentially the same as a payday loan, for $30; no matter the amount. I could go $2 over and bam, $30. This also applies to each transaction.

They do allow me to keep cash in my savings and still pull from this "credit", so for example I can transfer everything to savings and let my rent hit this "credit line", but if I'm not careful this is way more expensive then a payday loan.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#68

Post by calvinmorrison »

dvtrn wrote: post #39
calvinmorrison wrote: post #20

Earlier quoted context omitted.

What makes you think the rates are obscene?

What makes you think 300% interest on a financial instrument ISN'T obscene? I don't know of any other loan or line of credit with that kind of interest rate but payday loans.

Well basically because of the short duration and risk and small absolute value of the loans. To loan out $5000, often times a minimum from banks for a personal loan, I might have to do the overhead of 25 loans.

The rates are much more reasonable when you consider that.

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#69

Post by 1123581321 »

pnutjam wrote: post #67
1123581321 wrote: post #62

Earlier quoted context omitted.

Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though. Edit: in response to your edits, I think your credit union…

In my experience, credit unions have stricter lending rules. Mine does offer an overdraft protection, which is essentially the same as a payday loan, for $30; no matter the amount. I could go $2 over and bam, $30. This also applies to each transaction. They do allow me to keep cash in my savings and still pull from this "credit", so for example I can transfer everything to savings and let my rent hit this "credit lin…

Yes, there is an incongruence between use of a punitive fee to discourage behavior and the fact that fee revenue subsidizes low interest rates at many credit unions. The saving grace is that they are much more likely to refund the fee than a bank, but they don’t do it proactively let alone based on member profiling for financial illiteracy (low average balance, history of overdrafts, etc.) I think the approach could be much better.

Here’s a startup I really like that I think solves this overdraft problem effectively. They charge something like $1/mo for their service which likely isn’t sustainable standalone, but could work as a standard account feature at a bank/CU. https://www.dave.com

Re: Move to Pull Consumer Protection Rule Heightens Debate over Payday Lending

#70

Post by rootusrootus »

1123581321 wrote: post #69
pnutjam wrote: post #67

Earlier quoted context omitted.

In my experience, credit unions have stricter lending rules. Mine does offer an overdraft protection, which is essentially the same as a payday loan, for $30; no matter the amount. I could go $2 over and bam, $30. This also applies to each transaction. They do allow me to keep cash in my savings and still pull from this "credit", so for example I can transfer everything to savings and let my rent hit this "credit lin…

Yes, there is an incongruence between use of a punitive fee to discourage behavior and the fact that fee revenue subsidizes low interest rates at many credit unions. The saving grace is that they are much more likely to refund the fee than a bank, but they don’t do it proactively let alone based on member profiling for financial illiteracy (low average balance, history of overdrafts, etc.) I think the approach could…

I have both a bank account and a credit union account (for various reasons, I actually have accounts with several local credit unions). My bank (USAA) will refund nearly any fee if you ask. My credit union will tell me to pound sand. I otherwise like them, but they are super strict. My bank also has zero-fee overdraft protection as well. But I have a credit card with them, so that probably is why.
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