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

[Malthus]

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.

I agree.

I would assume a rational reason to use such a service is that the worst disaster if you are poor (or rather, excuse me CC, "financially challenged"  ) is not recurring but predictable expenses like rent, but unpredictable emergency expenses like car breakdowns and the like which the "financially challenged" simply lack the resources to have a fund prepared in advance for.

[CountDeMoney]

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.

They require high interest rates because profiteering off the poor has no real potential for a long-term revenue stream and a very narrow window of opportunity to recoup, unlike more conventional predatory lending practices, which can successfully milk people over a much longer timeline.

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.

Well, that's just too goddamned bad for them, now isn't it?  They should make more money, and then these meatheads wouldn't be so strapped for cash. 

[Sheilbh]

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

Maybe, but I'm not so sure after the crash to be honest. But banks aren't lending because of new regulations and their own need to deleverage. There's people who can afford to borrow, even at high rates short-term who can't.

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

I agree. But that's where we are for a lot of people especially since the crash. They're solvent and as the economy recovers they should recover too, but for now there are cash flow problems.

As I say in the UK we're in a period of wages stagnating below inflation, and utility costs (and rental costs in London) that are increasing way above the rate of inflation. That combination means that many people who are in work are getting caught with, as I say, cash flow problems. In this country the majority who use them are young, single and earning a below average wage. I think they're probably most likely to have problems with having the cash when the rent and an unexpectedly big utility bill are due in the same week.

And those are the reasons you need high interest rates, at least short-term. You've got Guido waiting in the corner. But also they're cheaper than other ways of getting the money like unauthorised overdrafts. And I think it's also a useful form of credit to have if the alternative is that people who are in financial difficulty can't use them as a way out (which I think you can, if you're very careful and picky) but are left to get in a worse state.

But using accessible credit to trap people into long-term, high interest rate loans that you never expect them to pay back is unethical in the extreme and, as I say, seems to me to cut away at the point of credit.

[Admiral Yi]

That's not a cash flow problem Shelf.  A cash flow problem is when you are still solvent (assets greater than liabilities) but because of iliquidity do not have the cash to meet short term commitments.  What you are describing is expenses exceeding income.

[Sheilbh]

That's not a cash flow problem Shelf.  A cash flow problem is when you are still solvent (assets greater than liabilities) but because of iliquidity do not have the cash to meet short term commitments.  What you are describing is expenses exceeding income.

That's not a cash flow problem. That's a list of reasons why people may go through them from time to time.

If you're on a variable hours contract you can be solvent, have income greater than your expenses and be unable to meet your commitments because you don't have the cash. Especially as I say, if you get an unexpectedly big utilities bill (which happens, believe me ) or your payday doesn't correlate with your rent payments (fortnightly against per calendar month, say).

That doesn't include immediate costs like, say, the cost of moving to reduce your rent (6 weeks of rent deposit and a month in advance normally).

Edit: And as I say the payday lenders tend to be more aggressive than other legal lenders, they cost a lot to delay and they're short-term so people often, wrongly, prioritise that repaying that debt over things like rent and utilities.

[Admiral Yi]

OK Shelf, you've convinced me of the legitimacy of uncredit-worthy people borrowing money short term.  Now what?

On the subject, anyone have any experience with pawn shops?  Ever bought anything in one?

I knew a guy in Korea, a Welsh semi-Trustifarian.  I say semi because his trust fund was not too bountiful, and every month when the rent was due and before his stipend had shown up he took his TV down to the pawn shop.  He also welched on a loan to me, doing nothing to mitigate the stereotype.

[CountDeMoney]

On the subject, anyone have any experience with pawn shops? 

When even bail bondsmen look down on you, you're definitely feeding from the bottom.

[Ed Anger]

I've been to a few pawn shops.

[Neil]

If you've been in a Gamestop, you've been in a pawnshop.

[Ed Anger]

If you've been in a Gamestop, you've been in a pawnshop.

Too many nerds. Last time I was in one, the employees got their toy lightsabers out. 

[The Brain]

I've been to a few pawn shops.

[Savonarola]

On the subject, anyone have any experience with pawn shops?  Ever bought anything in one?

When I first moved to Florida everyone asked me if I had ever been to that famous pawn in Detroit.  I had no idea what they were talking about, but it turns out Mega-Pawn was only a couple miles from where I had lived.

The rates on pawn loans are set low by law in Michigan; so much so that people will pawn their furs just as a means of storing them through the summers. 

[Barrister]

On the subject, anyone have any experience with pawn shops?  Ever bought anything in one?

Prosecuted lots of 'possession of stolen property' claims coming out of pawn shops.

On the one hand the pawn shop employs are fairly helpful, despite being repeatedly dragged into court.  I suppose they know if they aren't helpful the police will make life very difficult for them.

On the other hand the sheer number of such charges suggests that pawn shops are almost inherently and inevitably acting as fences for stolen property.

[crazy canuck]

And those are the reasons you need high interest rates, at least short-term. You've got Guido waiting in the corner. But also they're cheaper than other ways of getting the money like unauthorised overdrafts. And I think it's also a useful form of credit to have if the alternative is that people who are in financial difficulty can't use them as a way out (which I think you can, if you're very careful and picky) but are left to get in a worse state.

I agree, but that is no reason not to have a regulated rate of interest.  Here in Canada we have a criminal rate of interest which is, iirc, 60%.  If anyone charges above that - including "administration fees" all interest charges on the loan are void.  And we still have payday loan shops to fill that niche. 

[Jacob]

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

Especially when it's so profitable to lead people into those disasters.