It’s nice when someone takes the time to read an article and provide some thoughtful rebuttal. With the payday loan debate, it almost never happens. That’s because when the facts get thrown in the face of opponents, they slink away because they don’t have any actual rebuttal.
I turn now to Alan Krishnan’s reply to my Memo to Terry McAuliffe.
To begin, Mr. Krishnan perpetuates a myth regarding payday loan customers. He says, “The weakest of our weak end up taking payday loans”. This is false. Some 6 – 9 million Americans use payday loans annually, across a broad demographic:
Majority earn between $25,000 and $50,000
94 percent have a high school diploma or better
56 percent have some college or degree
68 percent are under 45 years old (only 3.5% are 65 or older)
Majority of customers are married
64 percent have children in household
42 percent own homes
57 percent have major credit cards
100 percent have steady incomes and checking accounts
Payday loan customers are, quite simply, the average working American. They are not “unsophisticated” as Mr. Krishnan claims. The term “unsophisticated” is really just a euphemism for what Mr. Krishnan won’t say out loud. What he means is “stupid”.
But a truly stupid person would utilize one of the more expensive options when a payday loan would serve them better. I have news for Mr. Krishnan: Americans are not stupid nor are they unsophisticated. They know how to shop around for a bargain. They recognize payday loans as a bargain, because they turned to them 154 million times last year. They could’ve used the other choices I presented, and many people did. But 154 million times, they chose a payday loan.
They chose it. They weren’t forced to use it. They entered into the transaction of their own free will. They understood the terms. They understood the fees. They made a decision, much as we all do, when faced with a decision about paying for a particular product.
“Is the price I am paying worth what I am receiving in exchange?”
We do it with televisions. We do it with refrigerators. We even do it with overpriced hot dogs at airport concession stands.
It’s no different with a payday loan.
“Is the fee of $15 per hundred borrowed worth the credit I am receiving in exchange?”
It’s a very simple cognitive process. It doesn’t even require that much “sophistication”. They asked the question in their minds and answered “Yes”, because the other choices weren’t palatable for one reason or another.
Customers are also a lot happier they chose a payday loan, because they saved themselves over $4 billion in overdraft fees and $6 billion in internet lending fees – which would be the only available credit options if Mr. McAuliffe has his way.
Remember, if you ban something, the demand doesn’t vanish. It just moves to another source to fill the need. We faced this issue before. It was called Prohibition. Remember what happened? People kept drinking. They just did it on the more expensive black market.
Mr. Krishnan asks, “why can there not be a central fund to make these loans at a competitive rate of interest?”
Why not? Because this fund would lose money hand over fist. Let’s assume that, rather than charging a fee of $32 per hundred (and it’s a fee, not interest), the “competitive interest rate” that Mr. Krishnan calls for is 36 cents per hundred borrowed. This article demonstrates why this central fund concept would literally lose billions of dollars annually. Therefore, private enterprise won’t touch it. Even the federal government under Obama isn’t stupid enough to throw money away like that.
However, if Mr. Krishnan can create a business plan that meets his goals, I’ll fund it. He’ll have a hard time doing this, though. Even Goodwill, a non-profit, tax-exempt charity, charges customers almost $10 per $100 borrowed (i.e., 252% APR) for their “Good Money” payday loan. Even though they are only trying to break even, Goodwill could not offer the product under a 36% rate cap. Heck, the Pentagon knows where armed forces members work, how long they’ll be employed, and have direct access to their paychecks – and even they can’t pull together a low-cost loan program!
Mr. Krishnan also asks, “Why can there not be a program to help people get out of this cycle of debt? Sadly, this program makes one borrow regularly, because most paychecks are gone to paying back the previous pay period’s payday loan! ” Again, this is false. 94% of loans are paid back on time. Also, the “payday loan cycle of debt” situation happens to an unfortunate minority who are either dealing with the few bad apples that exist in the industry, or who haven’t simply asked their lender for a payment plan. Companies that are members of the Community Financial Services Association offer these plans. Any reputable lender would because he would much rather get his principal back than have the borrower ultimately default and have to chase him down to get it back!
Mr. Krishnan also seems to believe that only lenders shoulder responsibility in a transaction. I’d ask Mr. Krishnan why he doesn’t believe that borrowers aren’t capable of being irresponsible, also? Certainly we’ve learned that the mortgage industry was driven by greed, and money was lent to people who had no business taking out mortgages. But what about those borrowers? Does Mr. Krishnan honestly believe that all borrowers were so “unsophisticated” that they didn’t know they couldn’t afford to take out a mortgage? That an adjustable rate is called “adjustable” because it will go up, making payments higher?
Borrowers are half of the transaction. They must behave responsibly, too. The system collapsed because of borrower greed, as well. People saw housing prices skyrocketing and wanted to get in on the action. They wanted to own a home even if they couldn’t afford it.
Mr. Krishnan also says, “ Time has shown this is not in any one’s interest, and it is the worst form of exploitation.” This is a profoundly ignorant and insulting statement. I am willing to bet that Mr. Krishnan has never used a payday loan, never visited a store, and never talked to any customers. I encourage him to do so. There is a real-world education to be had there.
(This is, by the way, one of the huge problems with this topic. A lot of opponents like to emit opinions without ever experiencing how things work in real life.)
Payday loans are in the public’s interest. Hundreds of billions of dollars in credit has been extended to people when they needed it the most. They’ve used this money to pay for doctor’s visits, to repair their cars so they can get to work, to help fund the purchase of a modest wedding ring, to pay a utility bill, to fill up their gas tank when fuel was selling at $4 a gallon, to buy an air conditioner for a stifling bedroom – the list goes on and on.
If Mr. Krishnan is looking for exploitation, he should look at banks and credit unions, which charge $27 in overdraft fees for an average overdrafted transaction of $60. You can get a $60 payday loan for only $9.
The other exploitation going on is by grandstanding politicians like Terry McAuliffe, and Matt Lundy of Ohio. They are literally handing customers over to the banks and credit unions by trying to kill payday lenders. It’s all done to feed their own ego. To get elected. To trick the 95% of Americans who have never even heard of payday loans to fall for the repeatedly-debunked “loan shark” argument.
Yet, Mr. Krishnan believes Mr. McAuliffe is a “Virginian with courage to take on anyone hurting Virginians”. I guess that means he’ll be punching out every mirror he passes in front of.
Lawrence Meyers can be reached at pdlcapital@earthlink.net
Loading ...
4 users commented in " Reply to the Daily KOS re: Payday Loans "
Follow-up comment rss or Leave a Trackback“I guess that means he’ll be punching out every mirror he passes in front of.”
Love that last line. Thanks for your always informative and well-written payday lending articles. I frequently read your work while researching my own.
Best Regards,
Sharon Secor
Payday loans are absolutely in the public’s interest. They are loans that people who need a little extra money from payday to payday can get, they are not just for the “weakest of the weak”
Majority earn between $25,000 and $50,000
64 percent have children in household
42 percent own homes
When you add those statistics together you get a scary picture. The “weak” are not the old and feeble, they are the families who can’t afford to put food on the table. These people take out payday loans because they have no savings. The argument is not against instant loans. It’s about the cycle they fall into once they start using them, and the high interest loans they can’t afford to pay back. These people need to educated on the options and they need to be taught how to save money, rather than be advertised at with cheaply made commercials promising them cash cash cash now now now.
It is good to make a difference and I am encouraged by my first business opportunity from my writing.
“However, if Mr. Krishnan can create a business plan that meets his goals, I’ll fund it.” This will happen, sooner than later.
Sorry, strength and weakness are not necessarily defined by how much one earns, their level of education, their age, marital status, family size, owning homes, credit cards and having steady jobs.
Payday loans require that the borrowers have jobs and regular paychecks. Steady jobs, because these are short term loans (paycheck to paycheck)that are paid back each payday. I said weakest of the weak because they have no ability to get out of the hole! I have met many on this economic situation, struggling to pay their rent each month. If they are married and their income does not significantly rise because of the marital status, the economic situation is only further weakened.
What they earn is irrelevant, it only determines how much they can borrow each time. In today’s world, annual earning between $25,000 and $50,000 is hard to live on as an individual, considering what rents are in most places. And of course, mortgages as well.
High school diploma or better, including some
college or degree does not train any one how to manage finances. That is the tragedy of our society. We do not train our youth to manage lives, finances, or desires.
Of course the majority are under 45 years old (only 3.5% are 65 or older)because that is when finances hit them the most! I should hope that by the time one is 65 most people stop receiving a paycheck and any one using payday loans are obviously in dire circumstances. Any one taking an isolated loan is not the object of concern, in those situations all the arguments in favor of payday loans are valid. The point of concern is when any one takes more than four such loans in a year. Do you have statistics or data on this? You are certainly better informed than I, and probably in the business, so you might have the data?
Sorry, the average working American is not “sophisticated”. I am disappointed that some one as informed and sophisticated as you appear to be attempt to put words in my writing - I am too sophisticated to call any one stupid, but I certainly have no hesitation calling behavior stupid. If you took a payday loan, I know it is an informed decision. If you took 10 payday loans in six months, I would have no hesitation stating that your action is probably stupid (without you being stupid). SO, please desist from making interpretations of my writing. I mean what I write, and I write what I mean.
Whom are you trying to fool?
If one made a payday loan once in a while (no more than 2-3 times a year) instead of bouncing checks and facing the consequences, I totally agree with your approach.
For years, I have extensively used credit cards and mortgages, and lines of credit to manage my finances. I have never taken a payday loan, you are right. And, that makes me stupid? I have never paid more than 6% APR, never 400% APR! Explain the economics here if you can - how paying 6% is stupid and paying 400% is smart.
Americans are not stupid nor are they unsophisticated. Of course. Why do you think they are? I wonder what made you think they were?
You have a great talent for using statistics in support of your pet theory, and vested interests. If you want to flaunt that they turned to them 154 million times last year, why do you not talk of the billions of times every week that folks turn to credit cards? By your own admission, the incidence of payday loans is insignificant in the big picture of the unsecured loans industry, does that reflect on their popularity?
Explain this:
For some one making $24,000 a year, with a paycheck of about $750 every every two weeks (and say about $1,600 every two weeks for some one making $50,000 a year)the payday loan will vary between $500 and $1,600. Right?
If they had a line of credit, or credit card, or overdraft protection in their bank account and they paid balances in full each payday, what would be their cost? Line of credit and credit card costs would be negligible. Overdraft protection would attract the terrible transaction fee (you are right, that is very much more expensive) unless the borrower plans it and transfers required funds in one operation which is usually not possible.
Yes, they chose it. They aren’t forced to use it. They entered into the transaction of their own free will. They understood the terms. They understood the fees. They made a decision, much as we all do, when faced with a decision about paying for a particular product.
“Is the price I am paying worth what I am receiving in exchange?”
Yes, they asked themselves the question, we just do not know what answer they received. I believe, it is -
“I have no choice, let me move with it”.
I have no problem with that. My problem is that it happens paycheck after paycheck. That is where this is akin to bonded labor.
Oh no, buying televisions, refrigerators, and overpriced hot dogs at airport concession stands are very different. You buy televisions once in many many years. Most of these people rent apartments with refrigerators, and those that own refrigerators change them once in perhaps 10 years. Most of them buy overpriced food because they do not think - and the fact that they pay for convenience does not make it right. It just makes it their lifestyle.
No, they did not chose payday loans because the other choices weren’t palatable for one reason or another - they just did not have another choice!
Two wrongs do not not make a right - because bank overdraft fees and internet lending fees are exorbitant, payday loans do not become a blessing. They are still a curse on society, albeit a curse that serves a purpose, and one that is hard to get out of. I would venture to say, impossible to get out of because probably 90% of the country is using it in one shape or other. Every one with a balance on a credit card is using a payday loan - the only difference is that the APR varies from 36% to 400%.
You are totally right, if you ban something, the demand doesn’t vanish. It just moves to another source to fill the need. That is why society needs a viable option that will work without being predatory.
With the high rates of repayment on payday loans, I am sure you know the actual percentages, there is no way any lender will lose on this deal. The processing cost of payday loans is high, because of human intervention for every transaction. I am not sure where your article demonstrates why this central fund concept would literally lose billions of dollars annually. We will discuss this offline,since you have graciously provided your contact address.
I do not agree with your statement: “Even the federal government under Obama isn’t stupid enough to throw money away like that.” Some of the bailouts are a much higher risk - if I received just one of those hundreds of billions being handed over, I would solve this problem, and make a good living in the process.
“However, if Mr. Krishnan can create a business plan that meets his goals, I’ll fund it.” Thank you for the offer, I plan to do this.
You are knowledgeable, and you know the reason this is so incredibly expensive is that the transaction costs are very high. The fee is a combination of transaction costs and interest (since we are not in the Islamic world, there is no money without interest having to be paid, no matter what one calls it). So the key is to reduce transaction costs. You, and I, know how this can be done. And we will, if you are serious. And, become rich without being so predatory.
Do people realize what else is predatory? Credit card companies that offer reduced rate (even 0%) balance transfer options (of course for a limited time)where the 3% transaction fee translates to a much higher APR considering the short introductory period for which APR is low! Previously, the maximum transaction fee used to be stated, now, increasingly there is no maximum! This is a subtle change that crept in unnoticed by most.
I do not understand what you mean by challenging my observation:
“Why can there not be a program to help people get out of this cycle of debt? Sadly, this program makes one borrow regularly, because most paychecks are gone to paying back the previous pay period’s payday loan! ”
You write:
Again, this is false. 94% of loans are paid back on time. Also, the “payday loan cycle of debt” situation happens to an unfortunate minority who are either dealing with the few bad apples that exist in the industry, or who haven’t simply asked their lender for a payment plan.
You ignore that most of these borrowers can not afford a payment plan - they need every penny to pay their bills and put food on the table, and THAT is why they go back a week later and take another payday loan! If the first loan was a month, instead of for two weeks, they will have saved one fee. That is the reason the loans are priced for two weeks. I am sure some offer weekly options, and perhaps even daily options?
Yes, Companies that are members of the Community Financial Services Association offer payment plans. Any reputable lender would because he would much rather get his principal back than have the borrower ultimately default and have to chase him down to get it back! BUT, these lenders would not make any more payday loans to the individual without exercising a lot more caution, and so the borrower finds another lender. This is no different from transferring balances from one credit card to another.
No, I never indicated anywhere that I believe that only lenders shoulder responsibility in a transaction.
Please do not ask me why I do not believe that borrowers aren’t capable of being irresponsible? Of course they frequently are. When some one borrows to pay rent, put food on the table or get their car fixed, they are desperate. At all other times, they are being irresponsible - unless the loan is an investment for their home, education, automobile or other asset. When sales are financed by sellers to keep their businesses going, like in the case of furniture, appliances etc., it is a calculated and hopefully an informed decision. But when the borrow is not well informed, it could be irresponsible.
Yes, the mortgage industry was driven by greed, and money was lent to people who had no business taking out mortgages. But what about those borrowers? The majority were told that the mortgage cost less than their rent, and by flipping properties in a year or two, there would be equity built into the investment! Most people do not understand that what goes up must go down. Only question is when and by how much.
Yes, I believe that most sub-prime borrowers were so “unsophisticated” that they didn’t know they couldn’t afford to take out a mortgage? That an adjustable rate is called “adjustable” because it will go up, making payments higher? AND, they did not factor on one of the borrowers losing employment, and they did not count on their investment losing 40% value making it impossible for them to pay back their debt in their lifetime. So it became a case of throwing good money after bad, and so they had no choice but to foreclose and walk away - either as an informed decision to cut their losses, or simply because they did not have the money to keep the payments going.
You are totally correct:
Borrowers are half of the transaction. They must behave responsibly, too. The system collapsed because of borrower greed (AND ignorance in many cases), as well. People saw housing prices skyrocketing and wanted to get in on the action. They wanted to own a home even if they couldn’t afford it. AND, they wanted to own not so much for home ownership, as to make money by flipping the home in a few years. You are right, the blame cuts both ways.
I an sorry to have made any statement that appears profoundly ignorant and insulting. That is certainly not fact, or the intent. Admittedly I am not informed of all the statistics of borrowers, but I am sufficiently aware of the exploitation in the industry. This does not excuse the exploitation in the banking industry - make no mistake of that! Two wrongs do not make a right.
You are right, I have never used a payday loan, never visited a store, and never talked to any customers. I will, and I know that I will get a real-world education that will help me craft the business plan that you have promised to consider and fund if it passes muster
I do not totally disagree that this is, by the way, one of the huge problems with this topic. A lot of opponents like to emit opinions without ever experiencing how things work in real life. However, I expect an informed advocate like yourself to be honest and admit that there are better ways to do this, it just has not evolved.
I completely disagree that Payday loans are in the public’s interest. These loans are no different from any other loan. Only the cost is to be considered. The failure is not of the payday loans industry, the failure is that the individuals require it paycheck after paycheck. To get out of this cycle of debt, the cycle of living not paycheck to paycheck, but one paycheck in advance to the next paycheck in advance has to end. This will happen only when budgets are developed to manage income and expenditure, paycheck to paycheck. In this turbulent economy with so many folks out of work, this is difficult. God willing, we will survive these challenging times and when people are more stable financially, things will improve.
Rhetoric and catchy phrases sound great. I would strongly recommend that some one as talented as you appear to be should attempt meeting McAuliffe and other leaders and engage in dialog to improve the necessary service.
Payday loans are here to stay, and that is probably why they were voted in originally. It is just that this puts people in a cycle of debt, not much different from credit cards and lines of credit where a significant number of borrowers make minimum payments. The problem in our society is basically living beyond one’s means - historically encouraged to stimulate the economy. Cheap money from China made these loans possible, so people borrowed and spent. Then, some lost jobs and could not make payments. Those who had a spouse, took loans. Those without a spouse probably defaulted.
The key is to get more jobs, and get all our people gainfully employed. McAuliffe is our best candidate to bring jobs to Virginia, I have spent hours with him and know he will do more than any of the other three candidates.
Leave A Reply