139% interest rate?! Crushing quick-loan rates turn $2,500 debt to nearly $14K

[Malthus]

If we think there's never any good reason to take out a payday loan the proper thing to do is ban them.

What about simply limiting the amount of interest that can legally be charged? 

[Admiral Yi]

What about simply limiting the amount of interest that can legally be charged? 

That has the potential, given the inherent credit risk of this type of lending, to cut off some borrowers, depending on where you set the limit.

Keep in mind that you get to crazy numbers like 6,000 % not because they charge 6,000 % but because of amortization of the processing fee.  At least based on what I've read.

[Savonarola]

I heard a story once on NPR's Marketplace about payday loans.  According to the piece, in states like Florida where the principle, length of time, and rate is limited the profits for an individual payday loan franchise is quite small and the only way to make money is to have many franchises.  The terms of the loans that only people who are bad credit risks would use a payday loan; so default is a significant risk.

Outlawing payday loans would be a boon to organized crime; there are always worse options.

[Sheilbh]

Here company's have to include APR in their advertisements and that's actually the figure used by one of the companies (5853% to be exact). Of course the company argues that that isn't representative or fair because they're only meaning to give short loans.

As I say the other problem is normally the roll-overs. The OFT found some companies rolled debt over up to 12 times (ie. for over a year), but even so about half their revenue comes from rolled over debt. So their example is you borrow £300, for 30 days at a £1 a day. When the loan's due and you can't pay the companies are normally very happy (and some actively encourage you) to roll that debt over for another 30 days and to keep it going. Some companies even offer another loan to help you pay back the interest

[Sheilbh]

Outlawing payday loans would be a boon to organized crime; there are always worse options.

I agree. But they seem sort of anti-credit to me. The basis of credit is that I give you money on the promise that you can pay me back with interest. These companies have barely any credit checks in place (that's a big selling point). I think it's a problem if a creditor is offering money without necessarily expecting their debtors will be able to pay them back.

Also as the Telegraph pointed out the payday loan companies often lend money to the insolvent and they normally get paid because they're most aggressive and short-term. But lending at an extremely high interest rate to an insolvent person seems more like you're cheating their creditors.

I think that's why I like the CofE's attempt. I don't think banning them would help, I'm not sure regulation would but I think trying to set up and fund alternatives is a good option especially for someone like the CofE. I'd like the unions to join in too.

[Malthus]

What about simply limiting the amount of interest that can legally be charged? 

That has the potential, given the inherent credit risk of this type of lending, to cut off some borrowers, depending on where you set the limit.

Keep in mind that you get to crazy numbers like 6,000 % not because they charge 6,000 % but because of amortization of the processing fee.  At least based on what I've read.

Sure, regulation will limit the profits of this sort of business, which would probably require some limits on lending and so cut off some borrowers. The issue is whether such limitations are more socially undesireable than legally allowing a form of debt peonage to develop.

I suppose the argument exists that any amount of regulation opens a market for the 'if you don't pay, we break kneecaps' organized criminal lenders of this world. That's a factor, but it ought not to be absolutely decisive - there is, I imagine, a reasonable range.

[Admiral Yi]

The issue is whether such limitations are more socially undesireable than legally allowing a form of debt peonage to develop.

I thought the issue was whether capping rates was a superior alternative to eliminating the industry wholesale.

[Malthus]

The issue is whether such limitations are more socially undesireable than legally allowing a form of debt peonage to develop.

I thought the issue was whether capping rates was a superior alternative to eliminating the industry wholesale.

There are three alternatives: regulate, eliminate, or do nothing.

I assumed, perhaps incorrectly, that the total wholesale elimination of the industry was seen by you as undesireable, so that the better alternative was to leave it be.

[Admiral Yi]

I assumed, perhaps incorrectly, that the total wholesale elimination of the industry was seen by you as undesireable, so that the better alternative was to leave it be.

I proposed wholesale elimination to see if anyone could offer up arguments for its continuation.  I.e. are there any really good reasons to borrow money at high interest for short periods of time.

Conversely Shelf and the Anglican Church seem to think that short term lending to the working poor is a nice thing, as long as it's done at low interest.  Or maybe not even the working poor.  Read some article a while back about some English king of the loan sharks.  He lent against welfare checks.

[Admiral Yi]

Speaking of dodgy loans, when I was in Pensacola, Florida I noticed a bunch of car title loan shops.  Never seen them anywhere else.

[merithyn]

Speaking of dodgy loans, when I was in Pensacola, Florida I noticed a bunch of car title loan shops.  Never seen them anywhere else.

They're all over around here, too.

[Neil]

How these things are legal I'll never know

I would rather imagine that it won't be for long.

[Sheilbh]

I think short-term lending at high interest rates has a place.

The problem I have with Wonga and the like is that I don't think their pricing is transparent, I don't think they even try to properly check someone's credit-worthiness and the rolling over troubles me because I think that's a different business than simply lending to someone. As I say I think a problem is that their model, as the Telegraph said, looks like inducing people to break their promise.

But lots of people, not just the working poor, have cash-flow problems. We've got stagnating wages, some inflation in many things but quite high inflation in utilities and rent which means people who are just managing can hit shortages of cash. There's a place for short-term credit there.

I don't think banning them would be a good idea, because I think there's a need and it's an area that you should have a legitimate market in. I'd regulate the roll-overs and maybe long-term interest on a short-term loan because I think that would shift the emphasis back to lenders looking to lend to customers who can and they think will be able to pay them back. And I think it's an area (because it's less regulated than banks and a relatively new market) where some well-funded new entrants, especially with a built in infrastructure like Church Halls, could do well but ethically.

[Admiral Yi]

Shelf, I think the whole point of this particular market is it serves people who have no credit worthiness.

And frankly borrowing to pay for recurring expenses like rent and utilities is a recipe for disaster.

[Malthus]

I assumed, perhaps incorrectly, that the total wholesale elimination of the industry was seen by you as undesireable, so that the better alternative was to leave it be.

I proposed wholesale elimination to see if anyone could offer up arguments for its continuation.  I.e. are there any really good reasons to borrow money at high interest for short periods of time.

Conversely Shelf and the Anglican Church seem to think that short term lending to the working poor is a nice thing, as long as it's done at low interest.  Or maybe not even the working poor.  Read some article a while back about some English king of the loan sharks.  He lent against welfare checks.

Well, one good reason is that there is a demand for it and if it isn't legal to service that demand, Guido "we break kneecaps" will.