To The Wisconsin Legislature:

I understand a bill is to be introduced limiting payday loans to an annualized interest rate of 36% APR, and that it has numerous sponsors.

Before voting for this bill, you need to understand three simple facts.

SIMPLE FACT #1: Due to the average default rate of 6% and average monthly store overhead of $8000, it is impossible for a payday lender to stay in business without receiving at least $15 in revenue for every $100 borrowed.

SIMPLE FACT #2: A 36% rate cap is a defacto ban. Sounds good on the surface, but the result will be to kill 3,462 Wisconsin jobs, suck $135 million in labor income out of those jobs, wipe out $214 million in Gross State Product, and deprive Wisconsin of $59 million in state tax revenue.

SIMPLE FACT #3: If your goal is to protect consumers, you will be hurting them.

Here’s why:

People who need short-term credit do not have a lot of options. Those options are:

A) Borrow from friend/relative/employer
Cost: Zero

Risk: Complication of important relationship, embarrassment

B) Credit Card Cash Advance – 

Cost: About $1 per hundred every two weeks

Risk: Fail to pay; credit rating is damaged

C) Pawn something

Cost: $9.50 per hundred every two weeks

Risk: Fail to pay, you lose the personal item.

D) Payday Loan

Cost: Averages $16 per hundred every two weeks

Risk: A collection agent tries to recover what’s owed; no damage to credit rating; no personal item at risk; no personal relationship at stake. 

Myth: “Cycle of Debt” – 94% of loans are paid back on time — that statistic is available in every single SEC filing of all public companies.

E) Online Payday Loan
Cost: $25 – 30 per hundred borrowed every two weeks
Risk: Same as regular payday loan, but industry is unregulated and identity theft is easier.

F) Bounce a check

Cost: Averages $45 per hundred borrowed

Risk: As soon as you bounce one check, you risk creating a domino effect, causing other checks to bounce and running those fees even higher.

Wisconsin residents are not stupid. They know a bargain when they see it. That’s why 25,000 payday loan storefronts exist in America. That’s why millions of American use it as an option. That’s why opponents never, ever bring up the fact that the number of complaints about payday lenders are miniscule.
They also never, ever bring up the fact that 94% of loans are paid back on time.

Don’t believe me? Open up the annual reports of any public payday lender.

The FDIC said a lot more in their November study of bank overdraft programs. In 2007, payday lenders provided 154 million loan transactions and collected $6.8 billion in fees.

But that same year, bank and credit union accounts were overdrawn by consumers 1.22 BILLION times, generating $35 BILLION in fees.

This bill will force consumers into choices they have already dismissed as being impractical, too risky, or too expensive.

Do not be fooled: credit unions cannot fill the gap that will be created, nor will they be able to offer loans at 36% APR. If that were the case, then hoards of competitors would be in business at 36% APR, and they aren’t. Furthermore, not everyone is a member of a credit union and, as noted above, credit unions are just as nasty as banks in dinging customers for overdraft fees.

There is a wide middle ground between leaving the product unregulated and banning it – a very wide middle ground. Cap rates at $17.50 per hundred borrowed. Require a payment plan for those unable to pay back in full. Limit the number of loans permitted at any time to three. Limit renewals. Most importantly, institute a required course for senior year of high school that focuses on personal finance.

If you pass this bill, you’ll be showing an awful lot of people that you don’t care about the facts, and you don’t care about them.

And then you’ll be labeled as Rep. Gordon Hintz has: A Job Killer.

Why would you do that to your constituents or yourself?

If you would care to discuss this issue, I’d be delighted. Just contact me at pdlcapital@earthlink.net

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