Pay-day Lending – there is a reason they spam you

I am quite certain my fellow bloggers are inundated by spammers who love your blog or post without commenting on anything specific. One of the more popular spammers comes from various pay-day lending groups. When we talk about bad types of capitalism, pay-day lending ranks close to the top. It is the worst form of usury as people in need get preyed upon by these folks. The pay-day borrowers do not realize they are paying an interest rate north of 200% as it is so easy to do.

Yet, what happens are the people in need set themselves up for a death spiral that is hard to pull out from. They begin a journey of paying more and more interest to pay off the use of funds a few weeks before their pay check. These lenders were outlawed in NC, which just meant they moved across the border to do more sales. I have heard people who say they provide a useful purpose, yet in essence they don’t. People are getting immediate money for a need coverable by their pay check. Yet, end up paying more than double or triple the amount they borrowed. And, it does not stop. You are beholden to the pay-day lenders for a long duration.

The lenders used to set up shop just off the military bases. This is unfortunate as they would prey on married couples who are separated by an ocean with one distracted  by war. The one at home needed the money and did not have the counsel of two heads asking is this the right path forward. In the volunteer charity work I do with homeless families, quite often the families are paying interest rates of 23% on a car loan. This type of car payment puts a huge bind on their budget and we help them get away from this loan and into a better one. Yet, for the pay-day lending, you have to multiply the 23% loan interest rate by a factor of 10 or more.

If you do not believe me, let’s do a simple exercise. If I have bi-monthly take home pay of $1,100 and need to get it now, the pay-day lender will give me $1,000. That will likely include a processing fee of some sort, but let’s say it is $0 and the rest due is interest plus the loan. So, the next pay-day, the lender takes my $1,100 payment to settle the loan. That is a 10% interest for a 1/2 month time period. Since there are 24 such time periods in a year, using simple interest, that is a 240% annual rate of interest.

If that is not bad enough, come the end of the 15 day period, I find I need my paycheck, so I reborrow it. So, I give them my paycheck, they take out another an extra $100 (I am rounding to make the math easier) on the interest I owe and they loan me $900 rather than $1,100 in take home pay. So, now I owe $2,200 on the use of $1,900. Assuming I could pay it back in 15 days, that would be a 1/2 month loan rate annualized to the tune of 379% per annum. However, I cannot pay the full loan back as my next pay check is only $1,100. So, I borrow yet again. The take out $200 more in interest due on top of the next $100, so I get $800. So, now I owe $3,300 on the use of $2,700.

I used a fictitious interest rate for the ease of the math. Yet, I also did not factor in a processing fee either. Yet, the purpose of the illustration is to show how fast you can get in over your head. Even if you did not borrow against a portion of your paycheck, you can soon end up owing the entire amount. A key problem is the people in need are the least likely to run the numbers. They just need the cash.

I am presuming the audience reading this is fairly astute, much more so than the average Joe’s and Josephine’s. If you have friends or relatives who are going down this path or who are considering it, help them look at other options. There are an increasing number of microloan possibilities whose lenders do not prey upon the borrowers. There are some other financial assistance programs that go under varying names. There may be some co-lending options as well. The dilemma is the pay-day lending is a vicious cycle that is difficult to break. So, help people avoid that cycle and try to get out of it if they can.

I do not begrudge anyone making a reasonable profit. Yet, I do find fault with people making an excessive profit off the backs of people who can least afford it. If you have a story about pay-day lending, please feel free to share it. Others need to see how this death spiral can affect people.

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15 thoughts on “Pay-day Lending – there is a reason they spam you

  1. There is an old fashioned word for what these companies practise: “usury”. Up until these sharks found a few loopholes, it was illegal. Now, instead of baseball bats, they have the courts to help them extort money from the poor.

    These companies also offer Visa/Mastercard debit/credit card accounts. What the clients are not told is every transaction or attempted transaction has a fee. Put money on the card, there’s a fee. Make a payment with the card, there’s a fee. If there is not sufficient money available on the account to make a payment, there is an uncompleted transaction fee. There is a monthly fee just because they can…These cards are basically tiny plastic shovels to bury you further in debt.

    It is a sad statement on our society that this is all justified by the ‘right’ to profit. Where are the rights of the rest of us to be properly informed and to be protected from these wolves? Just saying ‘well, it’s buyer beware’ does not make it right to cheat or steal.

    Thank you for bringing up this subject. There is so much to be said about it and so little information out there because it affects the least able to defend themselves or make themselves heard. The worst part is these people are made to feel embarrassed at being suckered in, at being in the situation where they sought out the services of these hoodlums.

    • Thanks for writing. I was unaware of the credit cards, but that makes sense from their standpoint. Several of my fellow bloggers have discussed that unfettered capitalism is a concern as the haves take advantage of the have-nots. We need reasonable capitalism with governance. The new Comsumer Proction Agency is a step in the right direction, but they need to get around to this kind of usury. Thanks, BTG

  2. I’m not sure reasonable capitalism with governance is possible. In my experience the “governance” doesn’t stop those who truly want to fleece and only adds regulatory and compliance burden to those trying to operate a legitimate business. Perhaps education and information/ disclosure is an answer. Thanks for bringing the problem to my attention, then again the issue has been around since Shakespeare was a playwrite.

    • Thanks for your thoughts and experiences from Downunder. It is truly a global problem. What is interesting is a new Consumer Protection Agency was created by a law signed by the President and his opposition is highly critical of it. All it has done this past summer is levy $560 million of fines on four so-called reputable credit card companies for fraudulent and aggressive marketing practices. A very high percentage of the fines are refunded to the disenfranchised card members. When I hear people say they don’t want regulation, I kind of chuckle. Yet, the problem with regulation as you correctly note is it often affects the people who would have complied anyway more than the evil doers. Thanks for reading and writing. We all much watch dogs on those taking advantage of others. All the best, BTG

    • He had good reason for it. Thanks for the reminder, Hugh. By the way, having worked for a big company, I have added a new level of hell for Dante. I call them the “listmakers.” The ones that create lists of things for you to do which get in the way of your doing the job you know should be done. Thanks for reading and offering your insights. BTG

  3. I have family members who have fallen into this trap, along with the pawn shop trap. It’s an endless cycle for some, even when they know better. But I wouldn’t loan these people money because the few times I have, I wasn’t repaid. Now, if I ever give a person money, I don’t even expect it back. This saves me a lot of wasted anger and frustration. I WISH they taught financial responsibility in school. A lot of people don’t understand how credit works, let alone the balancing of a checkbook.

    • When I went through school there was some teaching of checkbooks, writing checks, balancing the check book, etc. Accounting was an elective in H.S. Shortly after I graduated they cut out the Accounting classes to “save money”. They kept the marketing classes and dumped a bunch of money into the football team again.

      It would be great if they took at least two weeks to go over basic accounting, finance, credit scores, balancing check books, and financial responsibility in high school.

    • Thanks for your note. I think you came to the right conclusion. I wish they did teach this. For the homeless families we help in my volunteer job, helping people budget, understanding the differences between wants and needs, etc. is something they go to a class to learn. We call it “Bridges Out of Poverty.” Thanks for writing in, BTG

  4. You did a great job breaking down the numbers. The other issue is that these pay day loans, and defaults, are reported to consumer reporting agencies such as the credit bureau.

    Some credit unions offer small short term loans or even a “holiday short term small loan”.

    Some states have cracked down on pay day loans. Oregon state limits the interest rate to 36%. Washington State passed a law to limit the number of loans for one person to 8 per year. Yet the pay day loan lenders are also getting creative to get around that law.

    There are also some senators trying to get legislation through to crack down on the online pay day lenders; its the Safe Lending Act S. 3426 and H.R. 6483.

  5. I tend to think that the business model for lending business like this isn’t… “We’ll screw the stupid people”. I think it is more along the lines of… “When people already have a gun pointed toward their head it’s easy to pick their pockets.”

    If you live in a trailer and you, or your child, have a screaming toothache right now… try to get a bank to loan you money. Try to get a dentist to treat you without it. If missing work at your new job isn’t an option and your car needs $700 worth of work right now, where do you turn?

    None of this has anything to do with not knowing how to balance a check book, or, not learning financial responsibility in school. I tend to think it all has more to do with something the late Kurt Vonnegut once wrote.

    “It isn’t a sin to be poor in America, but, it might as well be.”

    • Vonnegut’s quote is unfortunately on point. We are helping homeless families through the agency with whom I volunteer with a required curriculum called “Bridges Out of Poverty.” Its goal is to help them budget better, distinguish between needs and wants, and make better decisions. Your third paragraph is very telling about what happens and people feel a need to reach out. This is a reason we need Obamacare to continue and we need to improve minimum wages. Thanks for your comments. BTG

  6. Pingback: We cannot outlaw stupidity | musingsofanoldfart

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