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June 24, 2010

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When I was in the Army I would sometimes run short of money with a week to go before payday. Why? Because we gambled. We shot pool, played cards, and shot dice. This was our entertainment. Sometimes I would have to go into Killeen as did many other soldiers and borrow $45 to pay back $50 in a week, for example. I knew the terms, the lending place knew the terms, and we were both adults. To me it enhanced my quality of my life.
My view is that the government needs to stop trying to protect people at every turn.

I think the credit card companies practices pale in comparison to these payday loans...

These companies really take advantage of people that aren't as savvy with there money as others.

I have never taken one of these loans, nor do I know anyone who has.

Years ago my sister (18 years old) took out a title loan which is essentially the same as a payday loan but places a lien on the car she owned at the time. Unfortunately Oregon does not, or at least at the time didn't, have usury laws.

Now she thought she was being a responsible adult at the time because her roommate had not been paying rent so she took out the loan to pay the rent. Unfortunately she didn't understand what she was getting into @ %400 interest she was unable to even make a dent in paying it back. While ultimately she gave up on it and her other debts by filing bankruptcy at age 20-21 the fact remains it was nearly impossible for her to repay the loan given her current job situation.

Now I'm not saying it wasn't her fault, because it most certainly was her choice to take the loan, the loan company essentially set her up to fail. I think it is criminal that these businesses are able to do what they do and I'm sure industry reform isn't far behind given the CARD Act, the recent financial/economic meltdown, and the talk of financial reform within the current administration. Bottom line is predatory lending like this needs to regulated.

They will get even more popular since the credit card "reform" bill will end up denying poor credit risks access to credit cards. Of course, once congress saves these people from pay day loans, they will end up at loan sharks. So it could be and will be worse.

bad deals and that goes without saying. that's why the average reader of this blog either may not know about them or may never need (or want) to use them. whether they are ethical is another debate that can be argued well from both sides. on one hand, these establishments are helping those in need (and those who simply want at their own risk), and on the other they are charging unusually high rates. but then again, they are legally allowed to.

in a nearby town we sometimes go to for discount shopping, the main road used to have one of these (ace cash express) just a year ago. today there are 8 within less than a quarter mile of one another (often across from each other on the street) on that main road.

these are here to stay - and from a business perspective a very lucrative operation. what is the fixed/ongoing operating cost to have a storefront? maybe 2k a month tops? these are low income areas (cheap rents), staffed by a person or two max, and are usually relatively small in size. the business can definitely endure downward trends in demands.

Three ways to tell if a neighborhood/town is declining. Count the pawn shops, rent-to-own stores and payday loaners in the area.

FMF: First you ask -

Who in their right mind would take out a loan that costs them 390%????????

Then later you say -

•They are bad deals financially. You should never, ever take one out.

To answer your question - The type of person who might take out such a loan is someone who currently has no liquid cash at all, has poor credit / inability to get cash, and has immediate expenses which will cause more pain than the substantial interest that comes with the payday loan.

Do you or your children need food/medicine now?

Do you have bills that are immediately due, such that if you wait until after your next payda to pay them, the overdue fees will be larger than the cost of the payday loan?

Clearly there are some people in a bind who have no better options and who should take out a payday loan.

One would hope, of course, that people would be more responsible and not get into situations like that. Further, the vast majority of folks who take out payday loans probably are in a different situation - where the payday loan is just feeding their desire for instant gratification.

Marc, however, is right. Too much 'protecting' people who need money now from the dangers of sleazy payday loan companies will only drive them into the arms of loan sharks.

Marc makes a good point. A lesson we supposedly learn during Prohibition.
@PMT if your sister doesn't take the loan she doesn't pay the rent? Would she have then been put out on the street?

Risk = Cost. These are loans of last resort. I have had to get a few payday loans because after being unemployed for 6 months with no unemployment (I was a 1099 employee), I had no choice because my credit cards were maxed. I have a job now (thankfully), but for the moment it helps make ends meet while I am trying to catch up. People need to quit complaining and take responsibility for their own choices. They need to understand these are businesses trying to provide a service, and they should be compensated for taking risks on people no one else will lend to...

Back in college a payday-type loan let me fix my car that got me to work and school and still allowed for me to pay the rent, all for $20. They are certainly last resort options, and am glad those days are long past, but I'm glad the option was there for me.

I'm not sure why these business are beat up as predatory and a wholeseller/retailer that sells a pair of $200 high tops are not (they not only "do nothing to encourage savings or asset accumulation" but actually may lead to the need for a payday loan in the first place). And this is nothing like the five figure nooses young low income people are given to go college (I'd rather have a $100 debt at 390% than a $50K debt @ 5% any day....)

PMT's sister's story above is a prime example. I'm not sure why not being able to get the payday loan and being homeless would have been the obviously better result for her. And regulating them to only charge a 'fair' rate of say, 26% (meaning a $1 charge on a $100 loan every 2 weeks) is not going to work for a population that defaults at such a high rate, and will effectively ban them.

When are payday loans NOT a bad idea? When you and your husband have two different checkbooks and realize that a check won't clear. A payday loan will cost less than a bounced check fee. That's why we've used them (and that was years ago).

@DIY Not likely to be homeless as she could have moved back with my mom...and eventually did that once the bills got too much and the relationship with her roommate soured. However, as most young adults she didn't want to move back in with mom/dad and felt this was the best choice...note she nor my mom are very good at handling their money.

I encouraged her to work with me on setting some goals/budgets and to get her back on her feet. While initially she said yes she never followed through with my attempts to help and sought bankruptcy instead. Fast forward 8 years and nothing has changed accept me loaning her money twice to help with shortfalls (this won't happen again as she can't even repay a small no-interest debt).

For her and most people I think it comes down to a misconception of the loan terms and interest coupled with inadequate money management skills/knowledge. Both of which my sister has inherited from my mom.

Very sleazy, these outfits. They remind me of the Rent-A-Centers where the person is effectively paying for the piece of furniture 3 times over just to have a nice place to set their ~you-know-what~

@Average Jo and SJ

I don't have a problem with a business making money and being fairly compensated for the risks they take. However, I do not see an interest rate of 390% as fair compensation but rather an unscrupulous business preying on those in need.

Yes the market charges what the market demands but often individuals receiving these loans really have no ability to make the necessary payments which is where the problem lies. If you pay it off in the 2-4 week time frame no problem it's the compounding interest that comes w/late payments that I have a problem with.

A few years ago here in Ohio there was a ballot issue to regulate the payday loans business. In the few weeks leading up to election day there were many articles that had said limiting the amount of interest a payday lender could charge would effectively put them out of business.

If I remember correctly the issue did pass and yet I still see lots of payday loan establishments around. So apparently they are still able to make a decent amount of money, even if they can't charge as much interest as they would like. My guess is they are still able to make money due to the fact that the interest rate is still much higher than any credit card rate, even though they are lending much less at a time (I think) than a credit card.

I've never taken one out, but you would be surprised to find out who does. Two of my friends brought up the fact that they were pretty much living on them for the extra $50-$100 they needed during "tight" months! I nearly gagged. I offered them the money they needed, but they politely declined. I could not imagine ever using a loan with an interest rate that high! Who could have thought that there was something that could make 19% credit card rates seem like a good deal?

while i do think they provide a service and are legally allowed to do so i totally agree that these should be a last resort and ideally avoided throughout your life. What i dont agree with is government stepping in and telling private business owners what they can charge for their service. if people are willing to pay 400% interest, let them charge that!

Preferred Financial Services

I realize that Payday lenders are scumbags but shouldn't we give some thought to the people that use them?

The users aren't scumbags of course but they are sometimes people, or the children of people, that have made one bad decision after another starting from the first day they attended school. Were they the kids that cut school frequently, seldom did their homework, were also being frequently disciplined and reprimanded and never gave a thought about the future as long as they were having fun in the present? Maybe they weren't at fault but maybe they were unlucky enough to have terrible role models in their early life.

My wife worked as a teacher in a pre-school run by the school district, only for single mothers that were trying to better themselves through education, job training, and work. Many were welfare mothers that were receiving subsidized housing, healtcare, and foodstamps as well as state subsidized childcare. These weren't the kids of stay at home mothers from the upscale neighborhoods, they were the kids that lived on the other side of the tracks. Many of these mothers were working hard to better themselves, were good mothers and trying hard to give their children a good life. However there were others that were just milking the system, never got off welfare, were terrible mothers and exposing their young children to the seamy side of life when they arrived home. Occasionally 'child protective services' or even 'the police' had to be called in because the teachers observed evidence of child abuse and the children would often be removed and placed into fostercare.

I can only imagine how difficult it must be for children such as these to grow up as well educated and financially responsible adults such as the people that are reading this blog. A lot of these children make it through their tough childhood and do well but the ones we should feel sorry for are those that do not, have bad role models and end up in trouble as teenagers, in juvenile hall, as single mothers like their mothers, are poorly educated, and are perpetually and desperately trying to obtain money without any thought of the eventual cost.

The 2007 National Defense Authorization Act limited the annual percentage rate on payday loans, vehicle title loans and tax refund anticipation loans to 36 percent, for active-duty servicemembers and their families. While this is still high, it's much better than 390%

Take the charges/fees that credit cards impose on cash advances, over the limit, late payment, low use,ect and change them into interest rates. Then see how they compare to payday loans.

Just like Holly, I was thinking about those rent-to-buy places being just as bad if not worse than these payday loan places. I remember seeing a flyer advertising Wiis at one of those places, for something like $20/week over 40 weeks.

$800 for a $200 video game!

These rent-to-buy places are also notorious for sending brutes to customers' houses to collect money owed or repo rented items as well if payments are missed.

There is definitely some predatory behavior and need for some regulation of short term loans. Its just too easy for unscrupulous companies to take advantage of people in desperate situations.

But I honestly don't think payday loans are evil in general.

If you take a short term loan and turn it into a 390% APR then of course it sounds horrible. But its not an annual loan, its a short term loan.

Short term is different than long term. Its like saying Hertz is charging me $18,000 /year to drive a car cause I pay $50 to rent it for a day. I'm not driving the car for a year, I'm renting it for the day.


We're really talking about a $15 fee to borrow $100 for a couple weeks. If you charged a 'reasonable' APR of 30% then for 2 weeks the interest on $100 would be $2.50. Doesn't $15 fee to loan someone $100 for a couple weeks sound reasonable? DO you really expect a business to loan $100 to someone with no credit for $2.50??

As izetim points out, the overdraft fees or late fees from banks and credit cards are worst if you apply the same kind of math.

Anybody else think it's mildly amusing that one of the google ads on the main page of FMF is for payday loans?


Payday Loans - (1 Hour)
$1,500 Wired to You in 1-Hour. Fast & Secure - Get Cash Now!

Ryan --

Yes, they match ads to the content. I suspected that would happen...

I took out a payday loan a few years ago and it was the worst decision I have ever made. It took me months to pay it off, because I got sucked into the cycle of reloaning. I had an emergency, and had to take take out a loan for $500. In two weeks, I had to repay the loan plus $60 or $70. When I was time to repay the entire loan, I didn't have the entire amount available, so I had to re-loan. It is a trap that looks innocent enough, particularly if you don't have any savings. Needless to say, it cost me so much money to finally dig myself out. Now, I have that %500 in my savings account, and I will never get a payday loan again. Don't do it!!!!

In Arizona, these loans were only possible because of a law that exempted them from interest laws. This law was only good for 10 years and is now running out. The industry put a measure on the ballot to extend it but, despite spending hugely on it, it failed to pass. So, beginning July 1, they can't charge more than 36%. Article in the Arizona Republic today that most are closing or turning to auto title loans.

I'm personally glad they're closing... except for all the empty storefronts because they were on practically every corner in some areas!

After a difficult divorce, a few slow child support payments, and trying to get back on your feet, a single mother can wind up with terrible credit. It’s becoming more and more common in today’s economy, but there are ways to get loans even if your credit is not good.

Peter, it's amazing! thanks!

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