I saw a couple walk into one of those Payday places this evening, and I wanted to shout "Run away! Run away!" But then I figured that they probably really needed the cash. Then I imagined opening up my own Payday place, but with reasonable fees. Then I realized that I don't have the money to do that...

I wish people would call those "Payday Loan" places their proper name: Loan Sharks. That's all they are. And that's how they should be treated.

Those interest rates will come down when the creeps who hand out those predatory loans get stiffed and lose their shirtsThey need to realize that it's not in their best long-term interest to screw people.

And I'm still waiting for the upper income strata in this country to grasp the simple concept that they too would be better off with a happy, healthy, and prosperous middle class. Maybe that's an advanced concept, but it seems self-evident to me.

Time is money.

The alternatives proposed do not provide short term relief to people of few means. Responsible public policy calls for regulation of payday loans. Legitimate lenders do not engage in criminal tactics to collect loans and are willing to agree to sensible protections for the borrower. The issue maybe hard for someone who has a line of credit at the bank to understand, but for some folks making ends meet for two more weeks is a good thing.

Most folks get back on their feet after a while and find other ways to borrow money.

I live in Jackson County Missouri, and last I knew, the county prosecutor was refusing to prosecute bad checks that were security on those loans. (If Ron Byers is around, he will know if that is still the case - he is an attorney here.)

When Japan moved to cap consumer lending recently, US financial services firms (Citicorp and others with investments in that sector) objected that it would be bad for the Japanese economy, deny badly needed capital to those in need, and drive people to the black market.

So you see, it's just market-tested altruism.

Why are these guys exempt from the usury laws? Whose pocket did they crawl into to get away with taking their pound of flesh from those who least afford it?

I have friends who fell into this trap, and relatives I've had to help bail out because of these creeps. Enough is enough.

TomStewart,

Federal lenders are exempted from state usury laws.

Maybe, I missed something in translation, but how could a loan market be regulated in “free economics� environment?

Is not keeping in debt a usual tool locally and internationally, a vital “free market� technique?

And, recently speaking of in-debt-drowning voters, how could such a traditional financial mechanism have been explained while the corporate bankrupts had nowadays factually been nationalised to prevent deepening a world financial crisis?

Hilzoy, what do you want? The rates are way down! They used to be almost 600%.

As a homeowner, I signed a letter from my city to keep another one from popping up in my town(near my house). I said the last thing our city needs is another predatory lending company to take advantage of the already disadvantaged.

The argument in favour of unrestricted lending rates is freedom of contract: it's up to the borrower what is and is not good for themselves, and regulatory efforts to save them from themselves are a paternalistic interference with their freedom, and damaging to a free market.

The strongest argument against is implicit in TomStewart's experience (and my own): high-interest lending (purposefully) generates personal financial crises that have external costs not absorbed by the original parties to the contract -- on other words, debtor and creditor conspire against the sympathy of family and friends of the debtor. The bargain is not efficient.

To make the argument against predatory lending stick, focus on the costs to the community, not the plight of the debtor. That's where the economic loss is, and it's an argument that will stand up to the scepticism of economic conservatives.

So who is Ms. Minda going to vote for?

I would not be surprised if it was McCain/Palin becuase "McCain is a hero," "Palin is just like me," and Obama is a Muslim.

Sigh.

Hey, Reg. Our good senator doesn't spell her name like La Streisand, she spells it the usual way "Barbara"

Blue Girl, I recently had a case where the new Jackson County prosecutor sent a 10 day letter threatening to prosecute a payday loan victim. It seems the law was changed to allow such prosecutions. The old prosecutor became county executive. I guess we will be instituting workhouses soon.

There was a fairly extensive debate about this in the Virginia Legislature this year. The crux of the matter is that banks don't lend in small amounts like these; for that, people are expected to use credit cards, and payday loan companies proliferate in neighborhoods where people can't get credit cards. (Which was news to me; I thought they'd give a credit card to anyone these days.) For that reason, the people who rely on them don't want them to go away entirely, though a lot of people who can see the harm they cause do.

Virginia limited interest rates (though they still end up sounding outrageous on an annual basis), and restricted the number of overlapping loans one person can have from all such lenders (two, I think) to try to cut out the loan-shark aspect.

Poverty can be expensive. I don't know the payday lending side of it, but consider these kinds of details:

* Checking account balance dangles near zero. Overdraft charges? Up to $35 per check. Got overdraft protection? Expect $20 to $35 for the transaction fee. The merchant fee on a bounced check will be high, too.
* Bank closes the account for nonpayment, with a negative balance which has grown to a couple hundred with interest and penalties; get your name/SSN listed at Chex Systems, so no new checking account can be opened at any bank.
* Pick up a prepaid debit/credit account. Advantage: No credit check, never an overdraft charge or penalty, credit card and online bill-payment options. Disadvantage: Fees. $10 to open the account, $5/month to keep it, $5 to make a cash deposit, $1.50 for ATM withdrawals (plus $2 to $4 by the ATM bank).

And, it just keeps going. Get a check from out of state? Expect more delays and fees, unless the sender paid the fee up-front on a cashier's check.

... And think about *this* irony: Out of those 19million households who take out those loans... How many will vote for McBush and MoosePalin?

Philosophically, the trap that some people get stuck in is awful.

Practically, though, maybe 391% is a fair estimate of the cost of these loans to lenders. Bear with me. Let's say someone comes to you and needs to borrow money to make it to the next paycheck. In fact, let's say they are so tight on money that they need to borrow money for an entire year. What are the odds that someone in that situation pays back the loan in a year? 1 in 4? That makes 391% look like reasonable market pricing.

Does anyone have info on default rates on these loans? It seems silly to regulate the interest a company can charge unless you also regulate defaults; if defaults are 60% per year and you pass a law capping interest at 100% per year, you might as well just outlaw the business in the first place (do the math).

I'm no loan shark apologist, but given that the problem here is an unregulated industry that seems to be ripping people off... why *hasn't* someone come along and charged "only" 200% per year interest, if they could make money doing so? Surely they'd corner the market and make huge profits from the volume. Maybe, given reality and all that, 200% isn't enough to cover the inevitable defaults?

I guess I'm just suspicious of proposed regulation that's based on (legitimate) emotional response rather than a complete analysis of the situation.

"I guess I'm just suspicious of proposed regulation that's based on (legitimate) emotional response rather than a complete analysis of the situation."

No, it's that you've never been really poor and have zero understanding of the situation these people are in. They don't have the time or money to "shop around" for the best deal, and usually go to the nearest payday loan store to get whatever they can get. Furthermore, your questions completely ignore the central issue, which is that it is the interest rate itself that is causing these people to be at a higher risk of default *on the payday loans*. Lower the interest rates, and they've got a much better chance of paying it back. But, that's not what payday loan stores are about. They're about exploitation, just like the rent-to-own furniture stores.

Would anyone in their right mind vote for Monica Goodling to be vice-president, someone a heartbeat away from being president?

Well, Sarah Palin IS Monica Goodling.

Just like Goodling, Palin abused her position of public trust, using her public office for personal/religious vendettas.

Just like Goodling, Palin lied, lied, lied, while claiming to be a follower of Jesus Christ, who I really doubt is the Prince of Lies.

Just like Goodling, Palin is unqualified to hold any government position, especially not vice-president or (God help us) president.

Palin equals Goodling, with the same disdain for the rule of law, our Constitution, the will of our founding fathers to keep church and state separate.

Palin equals Goodling, with all the horror this entails for the freedom-loving women of our nation.....

In italy the interest cap is set every month from central bank last month 17.27%

lending at 50% over that limit is a criminal offense

Debt is slavery. Period.

The ancient world knew this and that is why the Bible and the Talmud are full of admonitions against taking on too much debt and admonishing lenders to forgive debt.

I'd like to point out that 391% per year amounts to 6.3% for a two week loan, compounded 26 times to produce the annualised equivalent. (1.063 ^ 26 - 1) = 390% (close enough!)

In other words: on an average $400 payday loan for two weeks, interest charges and fees amount to only $25, which had to cover wages for the staff, fixed costs (eg shop rent), the lenders own interest costs and defaults (eg non-payments). It takes a lot of successful $400 loans to make up for one failed $400 loan. It seems hard to see how these costs could be reduced significantly, even if the payday lender was a non-profit. Some costs are relatively fixed whatever the size of loan and won't fall to cents just because you are making a small loan, if each borrower has to be individually processed in person. Remember these are people who don't qualify for an automated line of credit from a credit card company or a bank.

I also found the linked story to be a typical NYTimes personal finance piece, built around a cheesey "human interest" angle / sob story which, on close inspection, raises more questions than answers and avoiding any calculations or statistical analysis that might alienate readers who are less comfortable with math. Naturally it ends up with the conclusion that the subject was victimized by forces outside his/her control, and that "something must be done".

Even if the interest rate was zero, once Ms Minda had spent September's paycheck in August, what exactly was her plan for September? Where was another $400 going to arrive from, quite apart from any interest payments? The NY Times studiously avoids explaining this. Maybe the root cause of Ms Minda's problems was that she went for an easy short-term fix to her problems that was inevitably going to end in tears.

I would like to note that in North Carolina new payday lending was ended in 2006. Also since then only principle has been collected on existing loans. This was good news. I think one interesting note is that Military towns, Fayetteville, Jacksonville seemed to have that highest concentration of payday lenders at the time, this fact seemed to bring some Republican legislators on board to eliminate this loan sharking.

This is one of the times where Reagan was wrong and Government was the solution.

This is one industry that should be put out of business, but saying a "reasonable" amount of interest would solve the problem is just not feasible... Many times non-profits or co-ops have tried to get into the business charging less and have found out too many deadbeats make it impossible.

Why do nineteen million families have to resort to payday loans? Haven't Bush and McCain been telling us that the economy is fundamentally strong? All else aside, the fact that so many Americans are running out of money before they run out of month is an indictment of Republican economic policies.

I live in Ohio. The ads the payday lending lobby is running make the interest rate seem to be just 15%. They put actors on to talk about if they need $100 for their kids' school supplies and they want to take out a loan that will cost them $115, then they should be able to do that.
Another ad has Gary Coleman. The voiceover says to make sure you can afford the loan, and Gary says "What you talkin about?"
Really encouraging.

Payday loans just need to be abolished. The whole idea of them is to lend to people living paycheck to paycheck. These are people who have no business borrowing money.

Makes me wonder who the real terroists are.

Calculator,
Maybe the root cause of Ms Minda's problems was that she went for an easy short-term fix to her problems that was inevitably going to end in tears.

Rabi has the answer for you,
These are people who have no business borrowing money.

Short-term high-interest lending is very inefficient. The full costs of a borrower out of control are not all carried by the lender, and there is a case for tight regulation. Apart from which, I find calling people stupid a very odd way of honouring the ideal of economic freedom.

As usual, Hillzoy has it right. I could argue with the people who have argued with her, but there is a not-quite-OT story I should mention. The TV network, CW, is running a new series this year called EASY MONEY, in which a family running a payday loan business are the central figures. (I suppose it is an attempt to cash in on the success of WEEDS.) I would suggest that some of you write the network pointing out the pain this sort of 'industry' causes and suggesting firmly that they cancel the show.

"391 percent?!? That's outrageous!!"
--The Mafia

I recently called my credit card company to consolidate my debt at a lower rate -- roughly $8,000 at 2.99% -- and they offered to lend me another $60,000 at the same rate, locked in for a year. I almost dropped the freaking phone.

Clearly terrified that they weren't going to make much on my measly $8,000, and that I wasn't running up any more debt, they were trying to lock me in to more than seven times my original debt. When I turned it down, the woman on the phone began regaling me with tales of what I could do with the money. "Would you like to take a trip? Do you need to do some home improvement? How about a new car?" When I still refused, she said the offer would be available for another sixty days, and gave me a "special number" I could call. Three days later, a letter arrived from them with the same deal, and a sheet of perforated blank checks.

At least the Mafia doesn't come after YOU, trying to get you into debt up to your ears.

Blue Girl, I recently had a case where the new Jackson County prosecutor sent a 10 day letter threatening to prosecute a payday loan victim. It seems the law was changed to allow such prosecutions. The old prosecutor became county executive. I guess we will be instituting workhouses soon.

I do love me some Mike Sanders, Ron. (Mike Sanders is that former prosecutor Ron mentions) and there won't be any workhouses on his watch. He has been a breath of fresh air and a force to be reckoned with at every level of county government where he has served, and I look forward to a Sanders administration in Jefferson City after the Nixon administration that we are about to install to undo the damage Matt Blunt has done to this state. Missouri has lost more jobs in the last four years than all of the eight states that border us combined!

Hell of a time to make being poor a crime, huh?

Isn't usury forbidden by the New Testament? The Catholic church used to think so and probably most usury laws are descended from church edicts. Is right-wing morality based on religion or on "free enterprise"?

Unfortunately people are desperate, and sometimes gullible.

One thing not mentioned so far is that military folks* have also been abused by these loan sharks. At least Congress did something, per article:
http://www.nytimes.com/2008/09/07/us/07payday.html?8br
"In 2006, Congress capped rates for payday loans at 36 percent for military personnel. Following that example, Arkansas, the District of Columbia, New Hampshire and Oregon, as well as Ohio, have capped rates at 36 percent or lower."

I noticed that after my state capped the rate at 36%, several payday loan stores closed. Poor babies couldn't make it, I guess.

* And isn't it deplorable that many military families have to rely on food banks??? I'd like to hear Obama/Biden address this.

Jassalasca Jape

Apart from which, I find calling people stupid a very odd way of honouring the ideal of economic freedom.

I never called her stupid - the word does not appear in my post. How can I judge her when I have never met her and only have one short NY Times piece to go on? If the piece is accurate, I do stand by my suggestion that her financial choice in this particular case was probably incorrect. What is inconsistent about having sympathy with a financially struggling mother, and still criticizing a poor decision? Just because someone is a victim of circumstances in some ways doesn't automatically make them a saint.

This is exactly what I mean about NY Times personal finance articles: when they choose their "human interest" case study they absolutely ignore anything that doesn't fit their conclusion or might complicate their arguments. This makes their arguments weaker to me than if they had presented a more rounded argument and then came to the conclusion that all this lending should be banned.

My main point was that 391% AER is actually not as high a fee for short-term lending as the "headline shock" indicates at first glance. If you want to cap interest rates (like Hilzoy favours) you will have to put a cap around that figure, or you may as well ban it outright. It just seemed like the original post and the linked article never really tackled what 391% actually meant in dollar terms.

Ideally there would be a program in Ohio to help low income families afford school equipment. I feel that would be a more principled government intervention than pretending this is all payday lenders' fault.

I'd liek to think disclosure woukld solve all this.

A requirement that the terms of the loan be set out in APR interest rate in the biggest darkest font on the page and perhaps in red.

Make it attract the eye when it says 391% interest. I'd like to think no one would sign such a contract unless they don't think they're going to be alive next week because they're going to outer space to nuke an asteroid like Steve Buschemi in Armageddon.

Hannah: "I noticed that after my state capped the rate at 36%, several payday loan stores closed. Poor babies couldn't make it, I guess."

Doesn't that imply that payday loan stores do not make exorbitant profits? There are several arguments in favor of capping interest rates, but it seems to me that the strongest is that there is collusion in this market and the current interest rates are far in excess of costs. What you wrote is evidence against it.

As a purely positive question I would really like to know why interest rates on these loans are so high. Are lenders colluding? (And if there is collusion, how is it sustained? It is possible that there are links to organized crime to keep competitors away.) Are costs so high? Or, as people suggested in this thread, lenders are stupid and they could make higher profits with lower interest rates? These are not rhetorical questions, I really wonder what is the cause.