Notice that on today’s editorial page, we’re calling for the Legislature to get tough with payday lenders. This reminds me of a long-ago item from the first week or so of my blog: I published a summary of what Advance America had to say when they visited our editorial board last May.
Well, for those of you who want "balance" and all that kind of stuff, here’s a link so you can go back and read what those folks had to say.
After you read our editorial, of course.
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A lot of these sharks lending money at 300% interest are financed by the same banks which turn down their customers for overdraft protection on their checking accounts.
They then provide the names of those rejected customers to the paycheck lenders.
That is the part of the story where journalists reporting. The template of a boss hog pawnbroker type of villain is just fine, but a story about the pilllars of the community, who are all mixed up in the usual development projects, arts, and events, is off limits.
Former USC football coach and current Clemson assistant coach Brad Scott invested heavily into one of these “schemes” at the end of his tenure in Columbia.
Lee didn’t follow the links, did he? If he had, he would have read:
“Conventional lenders such as banks no longer do the small ‘signature loans’ (such as for $500 or less) that they once did, because the cost of processing it is greater than the return. He compared what his business does to the practice by banks of offering ODP (overdraft protection) service — something that has become an increasingly lucrative part of the bank business. He said banks used to drop customers who repeatedly bounced checks, until they realized how foolish they were — they were missing out on the fees they could be charging each time they save a check-writer from embarrassment (and higher fees) at the local merchant’s.”
Brad:
Of course I know banks quit making small $500.00 loans. That is why they created overdraft protection linked to a credit card, to automate the process and eliminate the cost of a person processing loans.
Friends and I have consulted to banks and credit card companies for years. We could tell you a lot about how they skin consumers. In fact, I did send information on this to The State, back when Warren Bolton was writing about it. I am glad to see someone followed up, at least a little ways.
Recent legislation prohibits some of the previous cozy relationships with banks and these storefront loan sharks. A lot of people don’t realize that many of the big furniture store chains are owned by consumer finance companies, many of which are owned by banks.
In some cases, banks are owned by finance companies, to reduce their check processing costs.
I remember back months and months ago The State wrote an editorial on Pay Day lenders right outside Ft. Jackson because too many privates and young soldiers were getting into debt. I agree with the editorial that there needs to be tougher regulation on businesses that can potentially exploit the uneducated public.
The problem isn’t the fee; the problem is the short term. If the loan comes due in two weeks, the borrower doesn’t have enough time to get enough money to pay the loan back and pay his other expenses. A 90-day term would be more reasonable, and could easily be managed. You charge whatever fee covers your administrative costs, plus your default risk and your cost of funds for 90 days. In this case, your default risk is reduced, not increased, by the longer term. Issuing a 90-day loan would cost little or nothing beyond the cost of issuing the 2-week loan; because the increased cost would just be the cost of $300 for 3 months. Even at a 20% annual rate, that’s only $15.
So if the present fee for a 2-week loan on $300 is $45, the fee for a 90-day loan would be $60.
The only possible reason payday lenders could have for issuing loans for only 2 weeks is to trap people on a treadmill of debt. It’s more profitable for them if people keep rolling the debt over and over and over, paying a new fee each time. People can’t get out from under these debts because they wind up paying fees totaling more than the original debt in a very short time.
Cooling-off periods aren’t going to help; limiting people to one loan at a time, or one lender at a time, isn’t going to help. What will help is to require lenders to issue loans having a term that will reasonably allow people to pay off the loans when they’re due.
Mary makes a valid point here. Cooling-off periods sound nice but I believe they would be ineffective and hard to regulate. Limiting a person to one loan and extending the grace period in which a person has to pay back the loan will help end this cycle of debt. Let’s face it anybody who has to use a pay day lender shouldn’t have more then one loan anyways. We as a society need to be more personally responsible with our personal finances.
Payday loans at 300% by the banking industry are just the smallest part of the banking problems in America. As more the promises of corporate careers and retirement reveal themselves to be a fraud, more employees seek to take control of their lives by starting small businesses. At the same time, banks have decided to ignore small business financing. All they want is the checking, the credit card financing of retail sales, and to collect as many fees as they can.
The lack of banking is especially hard on poor entrepreneurs, such as blacks and immigrants. It is a major impediment to states like South Carolina being able to sustain new high-technology businesses.
I’m not fond of what I call “white trash finance”–payday lenders, title loan places, etc. But I think the government should stay out of this area and let the market handle it.
No one forces these loans on anyone. They are agreements between the lender and the receiver freely entered into. Do they make sense? No, but who are we to go around telling people what to do.
Finally, outlawing this stuff will only drive underground creating a black market rife with loan sharks who use body parts for collateral. Not good.
There is some truth to the fact that it may be better to pay $30 to borrow $300 for a week or two, rather than bounce a check and pay the bank $35.00.
The problem is that the banks and loan companies are not competing. They are in business together.
The bank identifies customers who have no other source of small loans, people whom it used to lend money at 24% on a credit card. Now they turn them down, then send their name to a loan shark financed by the bank. The loan sharks mail a post card to the poor working stiff.
The churches should be running financial training programs for the poor, to teach them what they didn’t learn in public schools, and setting up financing mechanisms to put more of them into small businesses. Instead, the churches are busy helping illegal immigrants take the jobs.
The real scandal is that, as exploitative and predatory as these loan shark stores are, they are a better deal for many people than dealing with the main line banks.