The people who need credit the most obviously don't have any. Insisting that the only alternative to missing payments is with obscene-interest loans is like a doctor giving you the option of dying or sticking you with leeches.
"Insisting that the only alternative to missing payments is with obscene-interest loans "
The money has to come from somewhere and the interest rate is based on risk. If someone doesn't have any credit, it's most likely because they have no income or had credit and defaulted. This is high risk and should have a high risk accordingly.
The other question is, why can't they get credit from a bank?
I could get a $5000 line of credit at 18 years old..and I had no connections, a low-paying job, and no credit history. The only way you can't get credit is if you continue to misuse the system and become a risk to everyone.
We should be investing in more financial education.
The interest rate is NOT based on risk. It's based on them being able to do it because these people have no alternative. It's usury, plain and simple, and should be stopped.
The entire idea of a payday loan is necessarily high risk for reasons discussed ad nauseum, and that dictates the interest rate.
There would be no payday loans (smallish quantities of cash for short periods) without commensurately high interest rates. There's a very real risk of default, and smaller amounts of cash are not economical to process. (Have yet to see one that allows you to borrow <$100)
Put another way, imagine you're a VC type and want to disrupt payday loans. You do this by loaning money at more reasonable APRs - say something like 15%. On a one week loan at $300, your profit isn't even 25c. Even with economies of scale, even with all the automation and tech SV can muster, this operation won't even pay its own infrastructure bills. One default and you've wiped out weeks of profit.
Removing the option removes a useful and occasionally necessary tool for emergencies.
Nobody is saying not to allow payday loans. What's being said is to stop the unethical and usurious lending practices. I'm sorry, but being a "useful tool" is NO EXCUSE for what's being done.
Those two things are flatly equivalent, because short term loans do not work without high interest rates to both make the loans even a little profitable and to offset the absurd risk.
High interest rates are not automatically abusive just because you'd like them to be.
> We should be investing in more financial education.
Yes. If you are making a startup related to payday loans (like this one: https://www.lendup.com/ ) make sure that you include a financial education program in there somehow.
I'm still of the opinion that using APR's to describe a loan held for ~a week is about as useful as the weatherman giving you the forecast in degrees kelvin: technically correct, but completely worthless.
"Get $300, pay it back plus $30 a week later" is much more relatable. And isn't a bad deal, when you need cash now. Think medical, car impound, etc.
"Missing a payment" isn't even a thing you can have happen on most classes of payday loan. You have to provide a pay stub, and a post-dated check, and the money just gets taken out on the day of.
> You have to provide a pay stub, and a post-dated check, and the money just gets taken out on the day of.
That doesn't prevent missing payments; if it did, the risk profile on payday loans would be much different than it is and the costs would be much lower, in line with other, lower-risk, loans that exist in the market. There are several reasons why it is possible to miss the expected payment even with the paystub + postdated check approach.
(1) There's no guarantee that the next paycheck will be the same size as the previous one, particularly with the population (largely not salaried, often without paid leave available, and often with little job security) that needs payday loans.
(2) There's no guarantee that someone else won't reach into the account and take money before the payday lender gets it (including the bank itself, which absolutely will beat anyone presenting a check if there are fees, etc., due.)
(3) Its possible to cash/deposit paychecks other places than the account on which the postdated check is drawn, and people might do so if they have another unexpected expense, and decide paying that is more important than paying the loan.
> I'm still of the opinion that using APR's to describe a loan held for ~a week is about as useful as the weatherman giving you the forecast in degrees kelvin: technically correct, but completely worthless.
It's a comparative figure, which is particularly important for underscoring the consequences of owing money in the long term.
> "Get $300, pay it back plus $30 a week later" is much more relatable.
That's certainly OK to show in the UK, you just also have to show the APR.
> And isn't a bad deal, when you need cash now.
Assuming you can pay pack $330 next week and don't need to borrow $330 to pay $363 the week after...
> "Missing a payment" isn't even a thing you can have happen on most classes of payday loan. You have to provide a pay stub, and a post-dated check, and the money just gets taken out on the day of.
Again in the UK, but this is certainly possible. A post dated cheque can bounce, and should never be given out in the first place (you can cash them at any time).
>It's a comparative figure, which is particularly important for underscoring the consequences of owing money in the long term.
But it's not comparative -- in e.g. mortgages, they separate out costs (e.g. "closing costs", PMI, inspection) that should rightly count towards the effective interest rate [1]. If they did the same for payday loans, they could (reasonably IMHO) break out the (far more legit) processing costs -- say, $5 in labor, $5 (amortized) for overhead like security, and then you're paying more like $20 for "interest" if you measured by the same basis as a mortgage.
[1] For example, if they loan you $300k for the home at 5% but require $3000 in such costs, then they've really loaned you $297k at ~5.05%.
In the UK the APR is supposed to be a figure which includes all costs, it's why payday loans have such high values as any fixed costs are considered part of this. As far as I understand it anyway.
> APR (Annual Percentage Rate) - This is a figure which all lenders must quote when referring to mortgages. It is designed to show the total yearly cost of a mortgage stated as a percentage of the loan. It includes items such as the interest rate payable at the start of the mortgage and after the initial rate period has ended, Mortgage Application Processing Fee, Product Fee, Valuation Fee and Mortgage Fee. It is the overall cost for comparison purposes. This figure is intended to help customers to compare the overall cost of different loans.
I'm not sure what mortgage and title insurance are, perhaps they're more US specific things.
External costs (solicitors, taxes like stamp duty, etc) are not included in the figure.
100% agreed on the APR thought. It's because people don't think about the time of the loan when they look at APR - the only reason Payday loan APR looks expensive is because you have a week to pay it back instead of a year. If you could pay back a payday loan over a year (which why skyrocket the risk profile), the APR would be very low.
We don't think about any other product like that. Do you consider your tv cheaper if you pay for it over a year rather than at purchase? Of course not...
Generally physical items are considered more expensive if you pay back over time, not less. For total cost, loans are the same way, but are measured by APR instead.
Using APR to describe payday loan seems fine to me, because the major problem with them is when people get stuck perpetually rolling them over. Each individual loan may only last one pay period, but the debt can last a long time.
It's a tough area, because they can be extremely useful, but the exact same product can be a lifesaver or an anchor depending on who's using it. And naturally people who are most strenuously for or against tend to focus on the aspect which favors their argument.
