Monday, October 12, 2009

How "Interest"ing

A couple years ago, Assembly Speaker Mike Sheridan thought a 36-percent interest cap on payday lenders was a good idea. He co-sponsored a bill that would do it. Now - not so much. He now thinks the bill “goes too far”.

Payday loans can cost you 500 percent - even more - in annual interest, if you keep rolling them over because you can’t make the bi-weekly payments.
So what’s “fair”, Mike - 33 percent? 29 percent? What would YOU pay?

In the past year, owners of payday loan companies have cranked up the pressure on the politicians. They’ve paid for thirty hired guns (lobbyists) and dumped no less than 140 grand into the campaign coffers of politicians who are suddenly “on the fence” about regulating payday loans. See any connection here?

Did I mention that Wisconsin is the only state in the union that does NOT regulate payday loans?

As with any story, there are two sides. The payday loan folks say a 36-percent cap would put them out of business. I would imagine such enterprises have a fairly high rate of customer loan default. Then again, if you’re gonna get a 500 percent return, you gotta have a substantial amount of risk.

The lenders say they didn’t create the problem of poverty, that it was there long before they opened their strip-mall outlets, and capping their loan rates won’t make poverty go away.

Sheridan has now done a nearly complete about-face on the issue, recently telling the cable TV political channel Wisconsin Eye “there’s a lot of jobs that are impacted if you just eliminate the industry”. There are 542 payday lenders in Wisconsin, who wrote $723 million dollars worth of loans last year. Lots of lenders, lots of money.

What’s the rate? Twenty bucks per hundred borrowed, due in two weeks. That’s 520% annual interest. Most banks will gig you 30 dollars or more if you bounce a check, even if it’s for only ten bucks. My TI Business Analyst calculator freezes up when I try to calculate APR on THAT.

There are some other proposals floating around, up there under the Big Top. One would ban car-title loans, one would limit fees for late payments, one would put restrictions on rolling over the two-week payday loans. And one would create a database to ensure people don’t borrow money from one payday lender, to pay off another.

Sort of like the credit-card shuffle that got so many folks into trouble when the economy crashed. Now, since you can’t get a credit card that easily, apparently a lot of folks get payday loans instead.

And with the best lobbyists money can buy prowling the capitol on behalf of the payday lenders, and dollars flying freely into the campaign warchests of the politicians, things aren’t likely to change.

There are plenty of crooks on both sides of this issue.


5 comments:

  1. All right, I'll bite: what's wrong with the payday loan outfits?

    Based on the stats you posted, it appears that lots and lots of people are looking for small amounts of money in a hurry and can't get it any other way. They certainly can't go to their banks to get it. Lots of them don't have the kind of credit rating necessary. Either that or they're not asking for enough money for banks to do any business with them. $500 isn't an amount banks lend anymore...unless it's an extension of an existing loan or line of credit.

    520%...that's what my HP 19B Business Consultant II comes up with as well. I know people that have borrowed money from these outfits and have had to roll-over the loans to the next period or next couple of periods. It hurts, that's a fact.

    But what else is there? The fact that there are hundreds of these outfits in Wisconsin alone indicates that these services are popular.

    Instead of regulating payday loan outfits, what about requiring banks to make payday loans? Then it would all be fair, right? Banks would charge a fee for setting up the loan, of course, but the interest rate would be far below what the payday places charge, wouldn't it? Why not go that route instead?

    Steve Erbach
    Neenah, WI

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  2. Anyone who would willingly agree to a breathtakingly usurious $500 loan secured with a post-dated check is a problem for society, for such loans bring no good things - except to the lender.

    We should not allow predatory lending and should do what we can to obviate the underlying causes of the practice. Especially for relatively small amounts of money.

    I can only suppose anyone who would defend the juice loan industry is playing devil's advocate.

    I'll not bother crafting my own thoughts. Here's a snip from the Wikipedia entry on loansharking. It explains what the practice entails. A person's view of this sort of exploitation says a lot about them and, I suppose, their personal notion of morality.

    --
    "A loan shark is a person or body that offers unsecured loans at high interest rates to individuals.

    "The phrase 'loan shark' came into usage in the United States late in the nineteenth century to describe a certain type of predatory lender. The lenders to whom these epithets were applied charged high rates of interest and designed their credit products in such a way as to make orderly retirement of the debt difficult.

    "The phrase was originally applied to salary and chattel mortgage lenders who operated at the turn of the twentieth century. These creditors dealt in small sums (most loans were less than $100) and they charged high rates of interest (between 10% and 20% a month, and sometimes more). Many of these cash advances were interest-only and required a lump-sum payment to retire the principal. As a result, loans that were supposed to be short term often dragged on for months and years. To pay one lender, the debtor often took out another loan in a process that was called pyramiding. The loan sharks frequently colluded in encouraging this expanding chain of debt.

    "Licensed payday advance businesses, which lend money at high rates of interest on the security of a postdated check, are often described as loan sharks by their critics due to high interest rates that trap debtors, stopping short of illegal lending and violent collection practices. Today’s payday loan is a close cousin of the early twentieth century salary loan, the product to which the 'shark' epithet was originally applied."
    --

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  3. Hieronymous,

    >> A person's view of this sort of exploitation says a lot about them and, I suppose, their personal notion of morality. <<

    Oh, gawd! Now I feel such GUILT!

    My oldest son just yesterday took out a loan for $500 from a local payday loan place. He's using the money to buy a car. He can't get a loan anywhere else. I told him that he has to watch that he's never late and he understands. His plan is to pay off the loan early and his current job situation allows him to do so. He'll pay about $50-$75 for the privilege of borrowing $500 short-term as long as he pays on time.

    It's jejune to say, "We should not allow predatory lending and should do what we can to obviate the underlying causes of the practice."

    First of all, lets talk today, not the turn of the 20th century. If you think tarring current payday loan places with the same brush is an effective debate technique, then we're REALLY not going to get anywhere.

    Second, as Morrissey points out, 542 Wisconsin loan sharks made $723 million in loans last year. Lets do some simple math, shall we?

    $723 million divided by 542 loan sharks equals about $1.33 million in loans each for the year. With me so far? Lets divide that number by 52 weeks in a year to get $25,653 a week per loan shark. So, every business day (I'm ignoring holidays to make it simpler), each Wisconsin loan shark lends about $5130. Lets say there are 10 customers a day borrowing that money. That's $513 for each customer.

    Third: now, which bank do you know of will lend someone with poor credit $500? I'll wait...

    Lets dispense with the comments like, "I can only suppose anyone who would defend the juice loan industry is playing devil's advocate." "Only"? Not very imaginative of you. I don't happen to own any sort of stake in any of the hundreds of loan shark outfits in Wisconsin...nor in any other state or country. I guess that you must imagine that I'm delusional. Hmmm...

    Perhaps the REAL explanation for my "playing devil's advocate" is that I know that modern-day loan sharks AREN'T THE DEVIL! They're businesses, fer gosh sakes! They have to pay taxes to the state and federal governments. They have to pay unemployment insurance to the state and federal governments. They have to have all sorts of legal and proper things in place to run their businesses.

    I'm sorry to be a bit over-the-top sarcastic, but gee whiz! "Personal notion of morality"? "Playing devil's advocate"? Please.

    Steve Erbach
    Neenah, WI

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  4. Then there is the man who drowned crossing a stream with an average depth of six inches. Alas, you have since attempted to use mathematics -- statistics, actually -- to justify a sociopathic activity: In this case, taking advantage of poor, desperate people. No guilt trip or personal flame intended, but Res Ipsa Loquitur. I rest my case.

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  5. hieronymous,

    >> Alas, you have since attempted to use mathematics -- statistics, actually -- to justify a sociopathic activity: In this case, taking advantage of poor, desperate people. No guilt trip or personal flame intended, but Res Ipsa Loquitur. I rest my case. <<

    Oh, my god! 542 "sociopathic" businesses in Wisconsin alone! How could I have been so blind?! Who's got the sociopathic business watch this week?

    You haven't addressed the key issue here: how does a poor, desperate person with lousy credit get money quickly? Would you enact something like Fannie Mae and Freddie Mac for lending small amounts of money? That is, encourage lending money to high-risk people at subprime rates and subsidize the inevitable losses with taxpayer money? Why, how moral of you! Volunteering my money to give some poor schmoe a better interest rate on a loan of $500!

    You said, "We should not allow predatory lending and should do what we can to obviate the underlying causes of the practice. Especially for relatively small amounts of money." Well, gee, Hoss, got any ideas?

    No, wait! Don't tell me! I can guess! More regulations!!!

    Of course, that'll mean fewer payday loan places...but that's good, right? But desperate poor people will have fewer places to get money from when they need it, however...so that's bad, right?

    I don't believe that you've thought this through, old son...other than to gin up some highfalutin high dudgeon over high nominal interest rates.

    Steve Erbach
    Neenah

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