Payday Lending

Here is the opening to a delightfully combative post on payday lending at Liberty Street Economics, the blog of New York Fed:

Except for the ten to twelve million people who use them every year, just about everybody hates payday loans. Their detractors include many law professors, consumer advocates, members of the clergy, journalists, policymakers, and even the President! But is all the enmity justified? We show that many elements of the payday lending critique—their “unconscionable” and “spiraling” fees and their “targeting” of minorities—don’t hold up under scrutiny and the weight of evidence. After dispensing with those wrong reasons to object to payday lenders, we focus on a possible right reason: the tendency for some borrowers to roll over loans repeatedly. The key question here is whether the borrowers prone to rollovers are systematically overoptimistic about how quickly they will repay their loan. After reviewing the limited and mixed evidence on that point, we conclude that more research on the causes and consequences of rollovers should come before any wholesale reforms of payday credit.

Read the whole thing.

Comments

"Beneath it oft we've conquered, and we'll conquer oft again!"

"Critics often fret that payday lenders outnumber Starbucks as if they—payday lenders, not Starbucks—were a plague upon the land"

I'm a critic of payday lending, but, damn, that is an excellent sentence right there, and a beautiful takedown of Starbucks.

The one redeeming feature of Starbucks, in my opinion, is that they generally still allow the public to use their restrooms even if they did not make a purchase. When I take a long walk or bike ride, I see Starbucks as five star port-o-potties.

I worked at SBUX during college. Crazy long-beard filthy homeless guy came to the counter, shook my hand, and said, "Thanks, I just warshed my hands in yer terlet."

I'm still hoping he meant sink.

Here in the Philippines it's conventional for men--not women--to take a whiz by leaning against the wall or at a tree. No number two though. It will get you a fine in most other countries (public urination)

Bawal pag'nihi dito

What's bad about Starbucks? I look at their overpriced coffee as rent to lounge in Air Conditioned comfort.

"What’s bad about Starbucks?"

Personally, as a drinker of black coffee, its way too bitter.

The coffees roasted to hell and tastes like ash. Coffees a fruit, it should taste like it. Google "third wave cafe" in your city and give it a try.

Dunkin' Donuts has pretty good, lightly roasted, fruity coffee, surprisingly.

I like their Americanos and those are pretty cheap.

I see a pretty clear parallel with drugs. Wanting to outlaw one and not the other takes some explaining...and to my view creates hypocrisy from both left and right.

Do you mean to imply that absent payday loans, we'd seen more "loan sharking" and other illegal lending activity?

This may be true, but examples of international loan sharking cartels of the magnitude we've seen with drugs don't spring to mind. Doesn't mean it couldn't happen, though.

That wasn't my immediate thought but it's not far-fetched. More broadly I was thinking of the left/right philosophies on when the government ought to step in to protect people from themselves. Payday loans could be likened to financial crack.

Someone should move loan sharking onto the web, like the way eBay moved fencing, backpage moved hookers, and Uber moved illegal taxis. Payday lenders, your days are numbered!

https://www.lendingclub.com/

The behavioral economics is telling us a lot about the cognitive burden of being poor, and how choices to manage stress may not be to ultimate financial advantage.

What should an enlightened society do? Say that an industry which profits from misery is good?

Or engineer a solution that is a little more win-win in the long term?

Strip away the rhetoric of compassion and you get, "Poor people are too stupid to do anything for themselves." Indeed why give them any modicum of choice, given their persistence in buying iPhones, drinking soda, and watching TV all day? Tell us more about this "engineering" so that we might cure them.

No. The research says that being poor increases stress, reduces cognitive ability. Put you or I in the same spot, the same would happen to us.

This is exactly opposite the traditional cause and effect explanation.

Speak for yourself.

Ever been poor? Like, hungry and no money until next week kind of poor?

Yes I've been poor. Admittedly, not so destitute that I had no idea where my next meal was coming from, but those aren't the folks taking out payday loans.

Admittedly, the only person I've ever known who used payday loads was an alcoholic.

Well since you're speculating about "you or I"...I got buried in real estate in 08/09, and have been operating at negative or zero net worth since then. Fortunately, my cognitive abilities have not deteriorated to the point that I don't understand "pay your bills." Thus my credit facilities are quite reasonable.

Looking back, I'd say I was stupider when I was rich.

Oh pardon me! I missed the part of the research that demonstrates what would happen when you "put you or I in the same spot."

But do you have cash flow? If you're running a few grand a month revenues and a few grand a month costs, but still sitting a negative net worth (say ... student loans, mortgage, car loan, etc.), then you are definitely not poor.

It's a coefficient.

Being desperately poor likely reduces your IQ by, say, 10% and your emotional resilience by a similar percentage.

If you're high in both then you won't be impacted as much as someone who is low in both. And I bet growing up poor affects the baseline level for both.

> negative or zero net worth

Loser is a liberally, please try to be less of a stereotype.

Alain, you're too thick to even see who's on what side of the debate. Go back to your Glenn Beck.

Can you point to such research?

I remember reading about "research" which claimed that, looked to me like it was based on circular reasoning.

From Gochujang's summarized research:

Before responding, the subjects were given a series of common tests (identifying sequences of shapes and numbers, for example) measuring cognitive function and fluid intelligence. In the easier scenario, where the hypothetical repair cost only $150, subjects classified as “poor” and “rich” performed equally well on these tests. But the “poor” subjects performed noticeably worse in the $1,500 scenario. Simply asking these people to think about financial problems taxed their mental bandwidth.

This only contradicts how many studies which almost always find that the "rich" do better than the "poor" on intelligence tests?

Let me tell you about a real, actual, study along these lines, and the reaction of real, actual, liberals.

About 20 years ago I read about the purchase of refrigerators. At the time an energy star model was more expensive, but saved a fair amount of electricity. An effort had been made to get poor people to buy them. This was difficult because a refrigerator was a big purchase, always financed. An energy star version would cost something like $5 more per month. But the thing is, the electricity savings would be immediate, $10 per month. Immediate pay off.

And yet, they could not convince buyers.

I said "that's crazy." My real, authentic, liberal friends said "they are making choices that are valid for them!"

See the problem here, and the gap in political spectrum? We now know more about why those poor people made the wrong choice. It wasn't because they were crazy, or because it was "valid for them." They were shaped by their condition to fear monthly payment, and thinking emotionally.

We should provide them, as with payday loans, a better choice structure, but no one on the traditional right or left had the right framing.

How much of that is trusting the numbers? LED lightbulbs are sold under a similar premise but they only really add up compared to CFLs if they last as long as they're supposed to (15 years?)

Can you really trust a bulb to last as long as perhaps a third of your life? Nobody knows until they see it and experience it. A few anecdotes along the lines of "my bulbs died a year in" and you start to question the value.

Same with energy cost estimates. Do they actually stack up? Maybe I as an informed consumer can google and research that and see if it actually works. I doubt most people do and don't trust the labels to tell the truth. (Does your car actually get the EPA stick MPG, ever?)

How does your refrigerator example demonstrate anything about the effects of stress (whether from being poor) on cognition? All it says to me is that some people are bad at arithmetic, but we knew that already.

While researching all known ways to model discount rates in preparation for my thesis, I came across an article that studied implicit discount rates according to various purchases. The category of electric appliances was the furthest outlier, if I recall right (sorry, don't have the article), the implicit discount rate was somewhere in the range of 160% on average, for people who made many other decisions with implicit discount rates in more normal ranges of 10-20% (which is still anomalous compared to most investment returns).

However, I don't recall there being any inferred connection to poverty.

What do mean by poor?

The research says that when someone is thinking about stressful financial problems, their cognitive ability decreases. Middle class and upper class people suffer a degree of stress also---whether it be problems with career or family. The research does not show that stressful financial problems have a greater impact than other sources of stress.

The do-gooders could out-compete the payday lenders. Operate a non-profit to do the same thing, but offer better rates and credit counseling and comfortable couches to think it over and "maybe it's time for you to stop using our services" advice.

"Strip away the rhetoric of compassion and you get, “Poor people are too stupid to do anything for themselves.”"

The way the typical liberal sees it the poor are never to blame for their problems, though drinking soda seems to be an exception. It's always "society" which is to blame.

But they are missing the best argument against payday loans: that the poor people who use them are not behaving rationally. Do you think they are behaving rationally?

In matters involving time-preference and long-range planning, public policy should have a paternalistic cast. Which is to say that you distribute vouchers, insurance, and allowances for a limited ranges of services (medical care, long-term care, and schooling) and rely on income transfers to qualify market outcomes in all other areas. The alternatives to paternalism in some circumstances are not pretty.

Given that the returns on the margin to medical care and education are zero, this is a case of the "wise masters" being just as wasteful as the "poor and stupid". This seems more like status signaling than compassion. We get it, you spend your money on the best schools and doctor, a clear marker of belonging to our society's elite. Jokes on you though, because at least with lottery tickets you're only wasting ten cents for every dollar spent.

Given that the returns on the margin to medical care and education are zero

That's irrelevant to my point.

While we're at it, I visit the doctors on the referral lists of my health plan and haven't paid a dime for anyone's schooling in several decades.

If you are a full blown libertarian, heroin is just a choice, and government should not even provide a health warning. There's money to be made!

@Art

It's not irrelevant to your point, because education and healthcare are by far the prime choices when transfers are paternalistically guided. Premise A is that most people, especially the poor, spend their money in irrational ways. The solution would be to have an authority discourage them from doing that and incentive more rational choices. Usually in the form of "nudges". But the vast majority of authorities in these cases are at least, if not substantially more, irrational than their subjects. So arguing for more paternalism, without some way of subsantially restructuring common paternalistic priorities, is self-defeating.

@ Gochujang

Even with the cost of evading law enforcement, the price of street heroin is a quarter or less than most commonly prescribed "safe and effective" opiates. The vast majority of mega-billion pharmaceutical companies lobby for more drug prohibition, not less.

It’s not irrelevant to your point, because education and healthcare are by far the prime choices when transfers are paternalistically guided.

Yes it is, knucklehead. You went on a rant about elite education and boutique medical specialists, all perfectly non sequitur. The problem you have with medical care and especially long term care is forming viable actuarial pools. School vouchers do not replace private university education, they replace local schools run by public agency.

Is it probable that in the majority of cases they're making bad decisions? Sure. Is it the place of government to step in and save us from all our bad decisions?

"Heck yes!" -Mike Bloomberg et al.

"Do you think they are behaving rationally?"

Yes, they have a need for credit and they get it from the only source available.

If you need to get your car fixed to get to work, you need to get your car fixed. You worry about next week next week.

Per Pew, they're not usually used for one-off expenses:

http://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why

From the Pew research, "Most payday loan borrowers are white, female, and are 25 to 44 years old."

So...young white women are stupid.

wait, all the hand-wringing about payday lenders is to protect young white women? I thought we were trying to protect minorities.

@honkie please: "Strip away the rhetoric of compassion and you get, “Poor people are too stupid to do anything for themselves.”"

Not stupid so much as foolish, naive, selfish, short-sighted, and spectacularly bad at accurately perceiving long-term self-interest and planning accordingly. And, it's not just poor people; it's the overwhelming majority of the population. See: retirement savings rates, obesity rates, etc., etc., etc.

This is why libertarianism--in both its social and economic forms--is ultimately unrealistic and impractical in the real world. Unless you're an ice-veined sociopath who has little use for civilization and doesn't mind the bulk of the population gradually self-destructing.

All this irrationality afflicts the governing class too though, does it not? You might have noticed the emotional ebbs and flows of democracy greatly constrain technocracy.

I'm happy to hear this argument put so bluntly and elitist. Typically such rhetoric takes a less authoritarian form. At least this is honest.

"All this irrationality afflicts the governing class too though, does it not?"

...which is why the quality and sustainability of any civilization ultimately rests on the quality of its elites. Specifically, it rests on the ability of those elites: 1) to develop and maintain institutions and social norms that most successfully capture best practices, transmit them from one generation to the next, and phase them out when circumstances render them obsolete or detrimental; 2) to recognize and self-select for wisdom.

Don't get me wrong. I'd love to live in the world which libertarians implicitly postulate exists: one where everyone is a rational, highly self-motivated auto-didact capable of continual self-improvement and self-sufficiency to whom outside assistance and submission to authority are only detriments.

But, that's not the world we live in.

Most people are fools. Always have been. Always will be. That's human nature.

@FUBAR007

You're pining for a monarchy, where the family raises each generation and appoints the next in line with an eye on good governance. Good governance means the host remains healthy & content and the ruling family retains its privileges. They run governance lime a family business, all reap the benefits but only if they select the best CEO.

Compare to our system in which the governors are selected in contests; fine for small groups but for 300 million or a district of 700,000? At that distance, the voter has to intuit a great deal from limited exposure and the noise is too great, so the politician's winning skills (e.g. Fundraising, loyalty to machine politics, creedal obedience, acting) are not aligned with good governance. And once in power, that politician works on the next election with the same skill set plus the levers of government power. At no point is governing to promote long term stability, peace and prosperity a high priority (the impression and rhetoric thereof are).

Given its geography and population, the House of Saud has done a damn fine job in keeping that nation stable and peaceful (note, they aren't a patrilineal monarchy and will remove the incapacitated and that's key.).

I happen to think paternalistic policy incentivizes and reinforces the precise behavior that troubles you. It's not clear that such policy is in fact more compassionate, nor that society prior to the welfare state was necessarily a sociopathic affair. Sink or swim has the magical effect of producing a whole lot of swimmers.

"Sink or swim has the magical effect of producing a whole lot of swimmers."

But does it produce--in aggregate and over the long term--more swimmers than sinkers? Though, I do suppose that doesn't matter if the number and fate of the sinkers is perceived to have no moral dimension and thus to be of no significant consequence.

Also, you're presuming that desperation brings out the best in people.

Actual desperation likely isn't healthy, but I'd say the specter of it is.

You're more optimistic than I am.

Changes in policy lead to long slow changes in norms.

There's a great deal of common ground between conservative libertarian Charles Murray and behavioral economists. The difference is in the remedy, not the diagnosis. Mostly liberal behavioral economists want to employ nudges and regulations to get the poor to make decisions that are more aligned with their long-term interests. Murray wants to call them lazy bums, brow-beat them into going to church and otherwise shame them into better life choices.

So before you get too self-righteous, are you willing to criticize Charles Murray's views and, if so, what evidence can you provide to refute his diagnosis?

I say we give the poor more of your money.

Speak that I may know thee.

cognitive burden of being poor.
Really the issue is the cognitive burden of being stupid.

Notice how emotionally loaded this is: the assumption that just because someone is poor and has need of a short term, unsecured loan, they must therefore be miserable.

More like very stressed.

And what if Payday lending is an industry which profits from alleviating misery?

Haha, another excellent drugs parallel.

Well, an institution that is definitely about increasing misery in foreign lands disagrees about the use of payday loans to 'alleviate misery' in the USA - 'Last month, the Pentagon urged Congress to close these loopholes, releasing a report urging Enhancement of Protections on Consumer Credit for Members of the Armed Forces and Their Dependents. Citing "evolving predatory lending practices" in the payday loan industry -- the explosion of workarounds to avoid the restrictions codified in the Military Lending Act -- the Pentagon observed that the prevalence of payday loans in today's military is essentially unchanged from levels a decade ago. And it continues to challenge military borrowers' finances.

According to Pentagon figures, about 11 percent of servicemen and servicewomen have taken out "payday loans, vehicle title loans, bank deposit advances, [pawned goods at] pawn shops and/or [taken out] installment loans with interest rates over 36 percent APR."

Seeing as 36 percent APR is the interest rate Congress told these lenders not to charge military borrowers, the Pentagon deadpans: "specific definitions of problematic credit no longer appear to function well."' http://www.dailyfinance.com/on/pentagon-declares-war-payday-lenders/

Well, an institution that is definitely about increasing climactic misery worldwide and then lying about it is the typically German car maker Volkswagen.

Let's suppose you are correct and that the emotional stress of being poor causes bad decision making.

You wish to ban payday lending to the poor due to their inability to make good decisions.

Using your logic, do you also support preventing the poor from voting and operating motor vehicles due to the emotional stress they suffer?

This is a clear logical conclusion of your argument.

Voting is a constitutional right and restricting access to operating motor vehicles would be very difficult to enforce.

Poor people (well, most people) are legally not allowed to invest in hedge funds. This might be a more similar analogy.

It's not that the poor are unable to make good decisions; they make satisfactory decisions every day. Bad decisions are more characteristic of the young and the self-involved than of the poor. The problem is that a critical mass of the poor have a problem with time horizons and planning ahead. Most people who took out subprime loans did not default on them, but a sufficient number did to render the practice ill-advised.

Nearly everyone who can qualify for a license to drive is an adequate driver. Again, problem driving is a function of the life-cycle and drinking habits.

As for voting, the complications involved in administering property and educational qualifications tend to outweigh the marginal benefits. Both parties get a mess of people from every income and educational level. What's most predictive of voting behavior is one's marital status conjoined to one's sex, one's coarse racial classification, one's field (among the bourgeois), and one's region of residence. Income, class, and education per se are weak predictors

The many detractors of payday loans fail to consider the alternative. The alternative is not mainstream credit for the poor, for which they cannot qualify, it is the not-so-friendly neighborhood loan shark who extracts equal or higher interest and breaks kneecaps for the encouragement of others. It is precisely the rise of payday lenders that has led to the virtual disappearance of loan sharking in this country.

Yes. This is a valid argument in favor of payday/title pawn lenders. Interestingly, I learned that these loans are bundled, securitized and sold in tranches as well. Interesting times.

The argument makes sense, but payday lending is strictly regulated in some states:

http://www.paydayloaninfo.org/state-information

Is there any evidence that in these states loan shark type activity is more common? Wikipedia says there's not but they didn't cite any sources.

An alternative explanation for the decline in loan sharking is that the criminal element now has a much more profitable alternative business: drug dealing.

Actually, Pawn is much nicer. You don't pay back the loan, they keep your ring, and the transaction is over. No more obligation for the borrower.

Is that really the best anyone can do? Or are you choosing from a reduced set?

I propose we just give every adult a check for, oh, $50,000 on January 1 of every year. Since we will have then eliminated poverty and the consequent loads on people's cognition, we can fire a third of government workers at all levels. This thing pays for itself.

A monthly cheque would do better, since people are not always very responsible with their money.

How about creating a not for profit entity, like a credit union, to offer payday loans at cost, removing those icky profits from the situation? Serious question.

I suspect (without checking data) that profits are not high. Also, loss/default rate (it's a non-secured loan) is likely much higher than a bank loan. I suspect they are priced properly when you account for loss risk. The problem is that because they have a higher rate than a bank loan, critics assume that's all profit. Perhaps checking Prosper.com for similar borrowers and the rates they pay would be a better benchmark.

I couldn't stand to post this without a little data, so this 2007 study :http://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=1227&context=jcfl shows a profit margin of 7% and change, below Starbucks' profit margin.

Some credit unions have tried that. They still have to charge pretty high interest rates to not lose money doing it.

No, the alternative is not borrowing money when you cannot pay it back.

We have pawn brokers and title-loan vendors for microcredit distribution. We do not need legal loan-sharking any more than we need cocaine sold at head shops.

No, the alternative to payday loans is not getting a loan. That might mean going hungry for a few days; or it might mean not being able to repair your car which you need to drive to work, so you lose your job; or it might not being able to pay your (already overdue) rent so you are evicted.

Most people wouldn't even know where to find a neighborhood loan shark.

It might. Consumer credit is amazingly prevalent and systematized compared to what things were like in 1968. People also have relatives.

People might have relatives but unfortunately, they are usually poor too.

My impecunious relatives have non impecunious relatives, among them me. They never ask me for a dime.

My guess is that loan sharks don't want the pay-day loan business anyway. The clientele is too square and transitory and the profits per transaction are too small.

This has been disproven many times.

"[T]he typical brick-and-mortar payday lender charges $15 per $100 borrowed per two weeks, implying an annual interest rate of 391 percent! That’s expensive, to be sure, but is it unfair? . . . . [R]isk-adjusted returns at publicly traded payday loan companies were comparable to other financial firms". Payday lenders are just Goldman Sachs in miniature. Customers of payday lenders need credit just like customers of Goldman Sachs, the former needing the credit to pay this month's light bill and is charged 391% interest while the latter needs the credit to pay for the new Rolls Royce Phantom and is charged less than 1% interest. Of course, if the customer of the payday lender defaults, the costs of collection can be very high, especially the medical bills to repair the broken bones in the borrower's hands, whereas the customer of Goldman Sachs who defaults can simply loan his Rolls to the banker for a few weeks while the borrower gets things back in order.

"especially the medical bills to repair the broken bones in the borrower’s hands"

You think payday lenders (some publicly traded) are loan sharks?

"After dispensing with those wrong reasons to object to payday lenders, we focus on a possible right reason: the tendency for some borrowers to roll over loans repeatedly."

But that's basically the biggest criticism? That people who use these loans get trapped in a cycle.

Also the 10-12m who use these services don't necessarily like them, they just don't have other options.

I imagine the users hate them, but if you need money, you need money.

People do not go to a payday/title lender if they have any other good options.

Another good option might be to get on the horn to your cousin. Pew offers people are too embarrassed to do that. One reason might be that the driver of this borrowing is mismanagement of mundane budgeting and cash flow and not unexpected accidents.

In my experience being the cousin, it turns out to be more of a gift than a loan.

Actually, my understanding is they don't. Payday loan customers are intimidated by and feel uncomfortable in traditional financial institutions. Payday loan stores make a point of not making their working class customers feel inferior and out-of-place.

What begins as confirmation bias, ends as confirmation bias. That is sad, but certainly not unexpected.

For you?

How many even attempted to process research on the cognitive toll of poverty, and how many, to protect their priors, said "yeah, but here is an idea I just pulled out of my butt?"

I may be fickle in believing new research, but that is actually stronger in life than sticking with bias. Stopped clock vs clock watcher.

It runs counter to just about everything else we know about the stability of IQ and the relationship between environmental factors and IQ. It has never been replicated. Just below the paper was a comment by the most distinguished statistician working in the field suggesting that the results were due to a statistical artifact. If it came to the opposite conclusion I doubt it would even have been published.

There are a dozen similar papers.

How many came in here knowing nothing about them, and want to leave the same way?

Closed and locked minds, braying the bias they have constructed over the course of their lives.

Oh, here is another study challenging traditional ideas:

In March, for example, researchers from the University of Denver found that 96 percent of all inmates screened at the Downtown Detention Center in Colorado had brain trauma, mostly from blunt-force injuries to the head — much higher than the estimated 6 to 8.5 percent of the general population.

https://twitter.com/mims/status/656257101879074816

Is that why John Elway, Terry Bradshaw, Roger Staubach, Jerry Kramer are all in prison right now?

Why don't you take an IQ test after a divorce, job loss or a week of poor sleep due to money troubles, and let us know about the supposed "stability of IQ".

@Nathan W - plenty of people have recovered from all those setbacks. You have a childish view of human existence.

Well, this is no white and black situation where people going to payday loans are idiots.

Compared to microfinance rates in developing economies that also suffer from relatively high transaction costs........payday loans interest rate looks a bit high. Mexico 65%, India 21%. India is a curious case, big bank loan interest rate is in 10.5% and microfinance loan rate in 21%

http://www.cgap.org/publications/variations-microcredit-interest-rates

So, why is cheaper a microloan in India (or even Mexico) compared to the US?

Collective punishment (loaning to groups, the groups enforce the loans extra-legally), discriminating on the basis of sex, non-profits, lower labor costs?

Payday Lending is pretty exploitative, but poor people need the loans and they are bad risk to mainstream lenders. If you ban Payday Lending, it will go underground and you are just creating a niche for organized crime. Same deal for abortion, the only reason I favor keeping abortion legal is because I have lived in places where is banned, they still happen but under terrible conditions.

Other forms of contract killing currently happen under terrible conditions, but this is not commonly seen as an argument for legalization.

Again, the loans tend to be for mundane expenditures, not unexpected one-offs. If they're collecting multiple loans per year, it's a reasonable wager it's not predominantly driven by job losses. We have microcredit services in pawn brokers and title-loan brokers. Pay day lending adds little and has social pitfalls.

What's the big deal? If most of the borrowers were defaulting on these unsecured loans the payday lenders would close down. They are not so apparently they are not. According to the Pew research, "an average borrower uses eight loans lasting 18 days each, and thus has a payday loan out for five months of the year." That's obviously not sustainable so at some point they default and the payday lender loses and the borrower is relieved of the debt. That's what the federal government is doing with student loans.

Away from the US, the UK's financial regulator studied payday loans last year: http://www.fca.org.uk/news/fca-proposes-price-cap-for-payday-lenders

Before the price cap (that came in Jan 2015, so no evidence on impact yet) payday loans were typically £30 per £100 borrowed for 30 days (1000%+ APR). But there's evidence that they a) lead to significant detriment in many cases b) are often used for essentials, not discretionary spending (which suggests it's ultimately a wider public policy issue) c) are not in competition with other high-cost forms of spending (e.g. overdrafts), which could be because people who take out payday loans don't trust banks, like the anonymity of online payday lending, and/or like the definite structure of a payday loan. About 2/3s were repaid late, although most were repaid shortly afterwards I think. The UK's competition authority also did a study, although its conclusions were poor (anyone who thinks a price comparison site for PDL will work does not understand the people who take out PDL) https://www.gov.uk/cma-cases/payday-lending-market-investigation

There are other factors that suggest the market doesn't function properly, e.g. once you've successfully repaid one loan your interest rate stays the same rather than improving.

There is nothing at all wrong, in principle, with 30% interest on a short-term loan. The problems come when rollovers are highly encouraged & add up to significant amounts, loans are advanced to people with little prospect of repaying, and (in my view) when a loan *can* be repaid but by the end of that month they have to take out another one etc etc.

Mike- “an average borrower uses eight loans lasting 18 days each, and thus has a payday loan out for five months of the year.” That’s obviously not sustainable so at some point they default and the payday lender loses and the borrower is relieved of the debt

If and when that happens, the lender has received good interest on (say) 7 loans, and maybe a fee for missing payment and a bit more interest on top. That makes up for the money lost through the default on the 8th loan (although even that 8th roll might have been partially repaid)

Another interesting report: http://www.accaglobal.com/content/dam/acca/global/PDF-technical/other-PDFs/pol-tp-pdlfab-payday-lending.pdf

Then the payday lender is getting back a goodly share of his outlay and the borrower is relieved of the debt. Everyone wins, why do we need government intervention? (I was wrong about the process resembling federal student loan borrowing...the interest rates on the student loans are too low for the government to get back its outlay before it allows the borrower to default. Taxpayer loses)

If even one person were to die or be severely injured because they went to a loan shark for a "payday loan" instead of a Pay Day Lender because they were outlawed, then that would be enough to discredit any objections to Pay Day Lending.

Emotional arguments usually resonate with Progressives so I thought that I'd try one!

Has anyone done some research on the cost structure and regulations driving the costs of PayDay lending? It doesn't seem like charging $15 per $100 borrowed is a sensible way to price credit.

Assuming that there are fixed costs in processing an application, you'd expect to see fixed price loan fee plus a percentage rate. And repeat borrowers should get some kind of discount once their reputation has been established. My guess is that the lenders are bound to this pricing structure in order to comply with some kind of regulations as a "safe harbor" strategy to avoid anti-discrimination lawsuits based on ECOA and/or state-level statutes.

On the one hand, you've repaid us once, so you're less of a credit risk.

On the other hand, you're showing up here again, and no one who is not in dire straits shows up here repeatedly, so if you're here repeatedly, you're more of a credit risk.

These factors exactly cancel.

One would not be enough. There would have to be a more thoroughly informed balancing of costs and benefits.

Applying your logic, if there was ONE death from turf wars over drugs, then we would legalize drugs. But this hasn't happened, and instead drugs stay underground, fueling gang memberships and turf wars which are presumably responsible for a fairly large share of lethal violence in the USA.

If the borrowers were the sort of people that could establish a "reputation" they would get a credit card and pay only 24% annually.

The borrowers establish a reputation with the Pay Day lender, not the larger world. Presumably, because the borrower's FICO score is low, the computers at VISA and Mastercard would never accept their application. That's one kind of reputation. With a payday lender, a repeat customer who has paid before has established his reputation with that store's owner, a human being, not a computer. There are no upfront costs required to take another application and do other due diligence that impose fixed costs, regardless of the loan size.

The fact that he's back to borrow again doesn't necessarily mean he's a bad risk. There's no canceling out.

The poverty and decision-making, head trauma and violence, ideas are similar, and challenge traditional economics the same way.

You come up with one set of answers if you think everyone is a rational actor. You have to think harder if cognition is limited a little, or a lot, in various circumstance.

Even if cognition were perfect, there is poor quality information.

In the land of the free and the home of the brave, what's wrong with payday lending? It is, after all, a voluntary agreement between two parties. Where was the paternalistic state when all those nincompoops were buying timeshares? If payday lending is a rip-off of the unintelligent/uninformed what do you call state lotteries?

Especially when the Jets are an absolute lock to cover the point spread next Sunday.

The proceeds of state lotteries generally go to charitable works, no?

They're usually sold as a way to finance education. Back in the day, the DC Lottery spent more on administration than it deposited in the city treasury, quite apart from the payouts to winners. Someone said at the time that it turned out to be just another civic gravy train in a town for which graft was the norm.

You don't got into debt to buy a lottery ticket.

And the difference between going into debt and spending the utility payment on lottery tickets is...what?

Didn't read the article but no mention of poor people of a certain background being shut out of traditional banking due to bad or no credit?

Comments for this post are closed