by Lawrence Meyers
Third in a series of articles about the payday loan industry
One of the favorite claims of payday lending opponents is that payday loans are “usuriousâ€. We often see this claim made by the ignorant, though well-meaning, members of various “Interfaith Coalitionsâ€. The religious groups just love to band together to attack the moneychangers, as if we were somehow still ensconced in Biblical times.
Well, it’s the 21st century now, folks. Time to clue in. Payday loans aren’t usury, whether you define it with a standard secular dictionary or even pull from Scripture.
Here’s the definition of usury from a random Google search:
“An exorbitant or unlawful rate of interestâ€
Let’s take “unlawful†first. States that permit payday loans also specify the maximum allowable fee and/or interest by statute. As long as a payday lender makes a loan within those amounts, the loans are lawful and therefore not usurious. And, as it happens, legitimate payday lenders, which comprise of 99% of the industry, follow those exact laws.
Let’s define “exhorbitantâ€, per the same dictionary, as “greatly exceeding bounds of reason or moderationâ€.
We must ask what “reasonable†means in the world of short-term unsecured credit.
If a lender charges a price he deems reasonable that the borrower thinks is unreasonable, the borrower will not take out the loan. After all, if lenders charged 2600% APR, or $100 per hundred borrowed, they would not get any customers. It’s called “pricing oneself out of the marketâ€.
If the borrower wants a price he deems reasonable that the lender thinks is unreasonable, the lender will not make the loan. After all, if lenders charged 36% APR, or $1.38 per hundred borrowed, they would get many customers….but the lenders would go out of business within a month because they would not generate enough revenue to make up for overhead and defaults.
So we know that 2600% is too high and 36% is too low. So what is “reasonable�
It’s obvious. Ready? Here’s the earth-shaking news. We define “reasonable†to mean “that price that both the lender and borrower agree upon so that a transaction occursâ€. Most call this “the free marketâ€.
Since hundreds of millions of transactions have occurred in payday loan stores across the nation, both sides must obviously think the transaction is reasonably priced, or they wouldn’t undertake it, per the analysis above.
Therefore, the interest rate is reasonable, and therefore not exorbitant.
Thus, we see that payday loan rates are NOT usurious because the rate of interest is both LAWFUL and NOT EXORBITANT.
End of story. Usury claim debunked.
Now, some opponents will shout, “But borrowers have nowhere else to turn, so of course they take the loan at whatever rate they get handed!â€. Well, that’s not true. Perhaps they have an employer, friend or family member they can borrow from. Perhaps they can choose to delay a bill payment, work with a creditor, or bounce a check. But they didn’t select those options, did they? They WILLINGLY chose to take out a loan.
What a shock this must be to people like Ann Rasmussen, the former policy director of the Virginia Interfaith Center. Then again, I tried corresponding both with her and her pastor and they refused to engage me in debate. I guess the old adage, “I’ve made up my mind, don’t confuse me with the facts†applies here.
But perhaps Ms. Rasmussen and her peers aren’t interested in what dictionaries say. Maybe they live their life by Scripture, so they look only to Scripture in regards to this issue. If you visit their website, which I will not cite here because of the ridiculous, time-tested falsehoods and illogical arguments it presents, they ask us to make a “faithful pledgeâ€. It starts with the harrowing words, “USURY IS WRONGâ€.
No kidding. It is wrong. It’s terrible.
But payday loans do not constitute usury as I have just proven, so that invalidates the rest of the pledge. In the world of logic, once the premise is undermined, the entire argument is toast.
Be that as it may, they also announce that “this is a moral stand, not a political campaignâ€, which struck me as odd considering the very next sentence reads, “Let government decision makers know that no one should be charged more than 36% APR on any loan.†Funny, I thought hypocrisy is condemned in a few places in the Bible. Oh well, pick what you like and move on, I suppose. Plus, there’s that old saying that you can’t legislate morality. But I guess you can try! After all, Dubious Dick Durbin is attempting to do just that by introducing a federal rate cap of 36% APR.
The Center also presents a “Scriptural Foundation†for wanting to put that payday loan-killing 36% APR cap in place. Now I’m not usually one to bring religion into economics or politics, but they started it, so they deserve a response. I’ve edited their text for space and relevance:
“Nehemiah, Governor of Judah, had compassion for the Hebrew people who had returned to Jerusalem from Babylonian captivity. They were a crushed people. Nehemiah defended and protected them. After learning they were forced to borrow money on their fields and vineyards to pay the King’s tax, he was outraged. He brought charges against the nobles, saying, “The thing that you are doing is not good†(5:9). “Let us stop this taking of interest,†(5:10), and persuaded them to restore all that they had exacted from their fellow people.
[Nehemiah] demonstrated his love for God and for his fellow human beings by not allowing people in higher positions of power to take advantage of the poor. The Church’s work to protect and advocate for the poor and marginalized continues today. Payday lending preys upon financially vulnerable people directly and it indirectly undermines the church’s work, outreach, and contributions to poor and low-income people.â€
See, if you parse the text of Nehemiah 5, you find Ms. Rasmussen’s myopic interpretation fails to place blame where it is due – on the King. The Jews were oppressed due to the taxes they had to pay the King, not due to the interest they were being charged! This is a common tactic among payday loan opponents — place the blame where it isn’t due. If you are caught in a “cycle of debtâ€, they claim it’s the Lender’s fault, without ever placing some responsibility on the borrower for using the loan irresponsibly.
It’s also worth noting that Ms. Rasmussen cherry-picked an obscure translation for Nehemiah 5:10. Most Biblical texts actually translate that verse as “I pray you, let us leave off this usuryâ€, and not, “Let us stop this taking of interestâ€.
It seems Ms. Rasmussen’s agenda is to condemn the taking of interest in any circumstance. I’d suggest that without interest-bearing loans in today’s society, no loans would ever be made, and nobody would own a home, car, or much of anything else. Perhaps Ms. Rasmussen would prefer we wear tattered robes and live in mud huts in the desert, as well.
That being said, the parable here is that the Jews were truly powerless and starving, while being charged interest on loans for the fields where they worked their food. In this particular scenario, I’d say (as Nehemiah did), that this practice was indeed taking advantage of the poor.
However, much as Ms. Rasmussen wishes an analogy exists between the parable of Nehemiah and payday loans, none exists. Payday loans, when used and offered responsibly, don’t take advantage of anyone. They help people bridge financial gaps. When used irresponsibly, the fault lies with the borrower, unless the loan was made irresponsibly. In that case, the lender bears responsibility as well, but not all of it.
Any lender who makes a loan to someone truly poverty-stricken, who already owes other lenders and/or does not have any chance to repay the loan, is being irresponsible. But since 94% of all payday loans are paid back on time, I’d say that situation rarely exists in the payday lending space. What lender wants to make a loan to someone if they don’t have a reasonable expectation of getting their principle back?
With a 36% cap, payday lenders will be put out of business. This includes companies like First Cash Financial Services (FCFS), EZCorp (EZPW), Cash America (CSH), QC Holdings (QCCO), Dollar Financial (DLLR) and the venerable Advance America (AEA) This has been demonstrated ad infinitum. Ms. Rasmussen and others need to understand that this will only drive the people they purport to be helping to more expensive options (bouncing checks, unregulated offshore lenders, real loan sharks).
It continually amazes me that these people will accept the existence of God on faith, yet refuse to accept basic economic truths about supply and demand, which have hundreds of years of verifiable, solid evidence behind them. It isn’t that hard to figure out. Demand will not vanish if you take away an option. People will be forced to use other methods. Yet when confronted with these realities, opponents stick their heads in their ideological sandboxes – simple to avoid being proven wrong about something. A little humility in the face of the Lord is a good thing, if you ask me.
So why not just leave it up to consumers to decide what to do? After all, the Christian faith places a great deal of import on the exercise of Free Will, as one can only accept Christ by exerting it. Conversely, the ceding of control of one’s actions to another source is a trick of Satan. I therefore find it strangely ironic that Ms. Rasmussen exhorts people to turn their personal credit decisions over to “government decision makersâ€.
Hmmmm….legislators as tools of Satan. Maybe we’re onto something there.
Full Disclosure: At the time of writing, Lawrence Meyers was long shares of EZCORP, and held April call options on Advance America and EZCORP. Lawrence Meyers is a former writer for the Motley Fool, and is President of PDLCapital, a private equity firm (www.pdlcapital.com). This article is only an expression of the author’s opinion, may contain inaccuracies, and is not a solicitation to buy or sell any security. All readers are advised to consult with a financial advisor prior to making any investment. The author may be contacted at pdlcapital@earthlink.net Â
Also, be sure to pick up a copy of the author’s first published book, Teacher of the Year: The Mystery and Legacy of Edwin Barlow
14 users commented in " It Doesn’t Walk Like a Duck, So It Definitely is Not Usury "
Follow-up comment rss or Leave a TrackbackROTFLMFAO – what a load of horse crap. Larry Meyers attempts to fabricate the logical out of the illogical. Based on his arguments it should be fine to charge $10 for a bottle of water after a hurricane. Like none of us can see through this?
I particularly like the way that he personalizes the issues he has with Ms. Rasmussen, who by the way I can not find on any Web sites related to payday lending – as if she exists. Maybe he was just sorry that she would not return his advances – he does indicate that she stopped calling him.
The days of unregulated credit markets, like the payday lenders have enjoyed, are over. The duck is cooked.
Well, “Larry”, considering that you do not actually address a single argument I make, what credibility do you have? None.
The way a debate works is that I make an argument and then you counter it, using logic, evidence, and — GASP — facts.
Just like all payday loan opponents, when the facts are presented, the only argument you reply with is…nothing.
What arguments do you make?
Lauwrence Meyers can pick on some little girl and a pastor in West Virginia through a blog – big frickin’ deal. And it appears that they does not even work there any more.
Based on your arguments, if you can call them that, I guess you think that slavery should never be ended because there was a need, a market, and a fair price set in markets around the world. Is that what want to say?
ps – please GASP some more in your sophomoric reply so that I can imagine what it will be like as payday lenders whimper away from Ohio.
Definition of usury. Your reply? You have none.
You make the classic high school mistake of the false analogy.
The “argument” you apply, if you can call it that, makes an analogy where none exists. This is also called The Straw Man.
Usefulness of payday loans, especially considering the alternatives?
http://www.bloggernews.net/120218
Have a read, if you dare. You hate payday loans, and have provided NO argument whatsoever as to why, provide no solutions for what happens when they get banned (you appear to want to punish consumers by forcing them to pay more for short term credit).
You are just another ideologue who has never, ever had a need for short term credit, has never set foot in a payday store, never talked to customers, never talked to owners, and forms opinions based on fantasy, as opposed to reality.
Educate thyself.
paydayloanfacts.org
Yes, I’m biased! I want to have the ability to choose the products and services that make sense for me. That includes tobacco, guns, alcohol, pot, my doctor, the color of my car (see Calif. bans black cars), etc. And, I want that same choice available to everyone.
Larry’s premise is that payday loan transactions take place by the tens of thousands every month. Why? Because they make perfect sense for the parties involved!
When payday loan customers look at the spectrum of financial products available to them, the payday loan product often makes sense.
Yes, some payday loan customers abuse them; just like credit cards. And true, there are payday loan operators, like wall street, bankers, mortgage companies and more, who abuse their customers.
In the end, I still favor as many choices as possible with CLEAR and FULL disclosure of fees, rates, and terms for ALL of us
Usuary as defined by the states
ALABAMA, the legal rate of interest is 6%; the general usury limit is
8%. The judgment rate is 12%.
ALASKA, the legal rate of interest is 10.5%; the general usury limit
is more than 5% above the Federal Reserve interest rate on the day
the loan was made.
ARIZONA
, the legal rate of interest is 10%.
ARKANSAS, the legal rate of interest is 6%; for non-consumers the
usury limit is 5% above the Federal Reserve’s interest rate; for
consumers the general usury limit is 17%. Judgments bear interest at
the rate of 10% per annum, or the lawful agreed upon rate, whichever
is greater.
CALIFORNIA, the legal rate of interest is 10% for consumers; the
general usury limit for non-consumers is more than 5% greater than
the Federal Reserve Bank of San Francisco’s rate.
COLORADO, the legal rate of interest is 8%; the general usury limit
is 45%. The maximum rates to consumers is 12% per annum.
CONNECTICUT, the legal rate of interest is 8%; the general usury rate
is 12%. In civil suits where interest is allowed, it is allowed at
10%.
DELAWARE, the legal rate of interest is 5% over the Federal Reserve
rate.
DISTRICT OF COLUMBIA, the legal rate of interest is 6%; the general
usury limit is in excess of 24%.
FLORIDA, the legal rate of interest is 12%; the general usury limit
is 18%. On loans above $ 500,000 the maximum rate is 25%.
GEORGIA, the legal rate of interest is 7%; On loans below $ 3,000 the
usury limit is 16%. On loans above $ 3,000, the limit appears to be
5% per month. As to loans below $ 250,000 the interest rate must be
specified in simple interest and in writing.
HAWAII, the legal rate of interest is 10%. The usury limit for
consumer transactions is 12%.
IDAHO, the legal rate of interest is 12%. Judgments bear interest at
the rate of 5% above the U.S. Treasury Securities rate.
ILLINOIS, the legal rate of interest is 5%. The general usury limit
is 9%. The judgment rate is 9%.
INDIANA, the legal rate of interest is 10%. Presently there is no
usury limit; however, legislation is pending to establish limits. The
judgment rate is also 10%.
IOWA, the legal rate of interest is 10%. In general consumer
transactions are governed at a maximum rate of 12%.
KANSAS, the legal rate of interest is 10%; the general usury limit is
15%. Judgments bear interest at 4% above the federal discount rate.
On consumer transactions, the maximum rate of interest for the first
$ 1,000 is 18%, above $ 1,000, 14.45%.
KENTUCKY, the legal rate of interest is 8%; the general usury limit
is more than 4% greater than the Federal Reserve rate or 19%,
whichever is less. On loans above $ 15,000 there is no limit.
Judgments bear interest at the rate of 12% compounded yearly, or at
such rate as is set by the Court.
LOUISIANA, the legal rate of interest is one point over the average
prime rate, not to exceed 14% nor be less than 7%. Usury limit for
individuals is 12%, there is no limit for corporations. (As warned,
you cannot evade the limit by forming a corporation when the loan is
actually to an individual.)
MAINE, the legal rate of interest is 6%. Judgments below $ 30,000
bear 15%, otherwise they bear interest at the 52 week average
discount rate for T-Bills, plus 4%.
MARYLAND, the legal rate of interest is 6%; the general usury limit
is 24%. There are many nuances and exceptions to this law. Judgments
bear interest at the rate of 10%.
MASSACHUSETTS, the legal rate of interest is 6%; the general usury
rate is 20%. Judgments bear interest at either 12% or 18% depending
on whether the court finds that a defense was frivolous.
MICHIGAN, the legal rate of interest is 5%; the general usury limit
is 7%. Judgments bear interest at the rate of 1% above the five year
T-note rate.
MINNESOTA, the legal rate of interest is 6%. The judgment rate is the
“secondary market yield” for one year T-Bills. Usury limit is 8%.
MISSISSIPPI, the legal rate of interest is 9%; the general usury
limit is more than 10%, or more than 5% above the federal reserve
rate. There is no usury limit on commercial loans above $ 5,000. The
judgment rate is 9% or a rate legally agreed upon in the underlying
obligation.
MISSOURI, the legal and judgment rate of interest is 9%.
Corporations do not have a usury defense. (Remember that a
corporation set up for the purpose of loaning money to an individual
will violate the usury laws.)
MONTANA, the legal rate of interest is 10%; the general usury limit
is above 6% greater than New York City banks’ prime rate. Judgments
bear interest at the rate of 10% per annum.
NEBRASKA, the legal rate of interest is 6%; the general usury limit
is 16%. Accounts bear interest at the rate of 12%. Judgments bear
interest at the rate of 1% above a bond yield equivalent to T-bill
auction price.
NEVADA, the legal rate of interest is 12%; there is no usury limit.
NEW HAMPSHIRE, the legal rate of interest is 10%; there is no general
usury rate.
NEW JERSEY, the legal rate of interest is 6%; the general usury limit
is 30% for individuals, 50% for corporations. There are a number of
exceptions to this law.
NEW MEXICO, the legal rate of interest is 15%. Judgment rate is fixed
by the Court.
NEW YORK, the legal rate of interest is 9%; the general usury limit
is 16%.
NORTH CAROLINA, the legal interest rate and the general usury limit
is 8%. However, there is a provision for a variable rate, which is
16% or the T-Bill rate for non-competitive T-Bills. Above $ 25,000
there is no express limit. However, the law providing for 8% is still
on the books- be careful and see a lawyer!
NORTH DAKOTA, the legal rate of interest is 6%; the general usury
limit is 5 1/2% above the six-month treasury bill interest rate. The
judgment rate is the contract rate or 12%, whichever is less. A late
payment charge of 1 3/4% per month may be charged to commercial
accounts that are overdue provided that the charge is revealed prior
to the account being opened and that the terms were less than thirty
days, that is, that the account terms were net 30 or less.
OKLAHOMA, the legal rate of interest is 6%. Consumer loans may not
exceed 10% unless the person is licensed to make consumer loans.
Maximum rate on non-consumer loans is 45%. The judgment rate is the
T-Bill rate plus 4%.
OREGON, the legal rate is 9%, the judgment rate is 9% or the contract
rate, if lawful, whichever is higher. The general usury rate for
loans below $ 50,000 is 12% or 5% above the discount rate for
commercial paper.
PENNSYLVANIA, the legal rate of interest is 6%, and this is the
general usury limit for loans below $ 50,000, except for: loans with
a lien on non-residential real estate; loans to corporations; loans
that have no collateral above $ 35,000. Judgments bear interest at
the legal rate. It is criminal usury to charge more than 25%.
PUERTO RICO, the legal rate of interest is 6%; all other rates are
set by the Finance Board of Office of Commissioner of Financial
Institutions. Judgments bear interest at the same rate as the
underlying debt.
RHODE ISLAND, the legal rate of interest and judgment rate is 12%.
The general usury limit is 21% or the interest rate charged for T-
Bills plus 9%.
SOUTH CAROLINA, the legal rate of interest is 8.75%, and judgments
bear interest at the rate of 14%. Subject to federal criminal laws
against loan sharking there is no general usury limit for non-
consumer transactions. The South Carolina Consumer Protection code
provides regulations for maximum rates of interest for consumer
transactions. Please consult with counsel for the latest rates.
SOUTH DAKOTA, the legal rate of interest is 15%, judgments bear
interest at the rate of 12%. There is no other usury limit. There are
certain limitations on consumer loans below $ 5,000.00.
TENNESSEE, the legal rate and judgment rate of interest is 10%. The
general usury limit is 24%, or four points above the average prime
loan rate, WHICHEVER IS LESS.
TEXAS, the legal rate of interest is 6%. Interest does not begin
until 30 days after an account was due. The judgment rate of interest
is 18% or the rate in the contract, whichever is less. There are a
number of specific ceilings for different types of loans, please see
counsel for information.
UTAH, the legal rate of interest is 10%. Judgments bear interest at
the rate of 12%, or a lawfully agreed upon rate. There are floating
rates prescribed for consumer transactions. Please see counsel for
information.
VERMONT, the legal rate of interest and judgment rate of interest is
12%. On retail installment contracts the maximum rate is 18% on the
first $ 500, 15% above $ 500. The general usury limit is 12%.
VIRGINIA, the legal rate of interest is 8%. Judgments bear interest
at the rate of 8%, or the lawful contract rate. Corporations and
business loans do not have a usury limit, and loans over $ 5,000 for
“business” or “investment” purposes are also exempt from usury laws.
Consumer loans are regulated and have multiple rates.
WASHINGTON, the legal rate is 12%. The general usury limit is 12%, or
four points above the average T-Bill rate for the past 26 weeks,
whichever is greater. (The maximum rate is announced by the State
Treasurer.) Judgments bear interest at the rate of 12% or the lawful
contract rate, whichever is higher.
WEST VIRGINIA, the legal rate of interest is 6%. The maximum
“contractual” rate is 8%; Commissioner of Banking issues rates for
real estate loans, and, may establish maximum general usury limit
based on market rates.
WISCONSIN, the legal rate of interest is 5%. There are a myriad of
rates for different type of loans. There is no general usury limit
for corporations. Note that a loan to an individual, even if a
corporation is formed, will violate the law. The judgment rate of
interest is 12%, except for mortgage foreclosures, where the rate
will be the lawful contract rate.
WYOMING, the legal rate and judgment rate of interest is 10%. If a
contract provides for a lesser rate, the judgment rate is the lesser
of 10% and the contract rate.
Arkansas defined it in their constitution
According to Article 19, Section 13 of the Arkansas Constitution, the cap on interest rates for consumers is 17 percent.
BTW – Shall I define slavery as well, or is your silence suggesting that you know what that means and would have supported that institution as well based on the needs of the “market” that is rarely free for most people.
Larry,
You are demonstrating a degree of ignorance concerning usury law and payday loan laws. In the states where payday loans are permitted, they are there by ENABLING legislation — legislation which grants a specific exemption for payday loans. In that case, the page you want is here:
http://ncsl.org/programs/banking/paydaylend-intro.htm
So there goes your usury argument, although it was a nice try.
Re: Slavery. I already told you that this is a False Analogy. To be specific: http://www.onegoodmove.org/fallacy/falsean.htm
To prove a False Analogy, “Identify the two objects or events being compared and the property which both are said to possess. Show that the two objects are different in a way which will affect whether they both have that property.”
You said, “slavery should never be ended because there was a need, a market, and a fair price set in markets around the world. ”
Payday loans: Need? Yes. Market? Yes. Fair price? Yes.
That is where you analogy ends.
Payday loans: Provide a benefit to both parties of the transaction. The consumer gets desired short-term credit. The Lender makes a profit.
Slavery: The Slaveowner gets cheap labor. But the slave, well, it’s obvious this isn’t beneficial to him in any way.
Payday loans: A moral and ethical method of extending credit.
Slavery: Not moral or ethical in any way.
Payday loans: Benefits society by providing a service to those in need.
Slavery: Direct cause of millions of murders and displacement, while also being a direct cause of the Civil War.
I could go on and on, but I’ve sufficiently dismantled your argument.
Does Lawrence Meyers work for or have a financial interest in the payday loan industry?
What difference does it make?
Facts are facts.
If you want to argue a case based on its merits, then do so.
Meyers’ only interest in the payday lending industry is that he is bankrolling them through his venture capital fund, http://www.pdlcapital.com.
When he asks what difference it makes it makes let me him know that it makes him look like an ever bigger fool for thinking that we do not see through his greed.
ps. NO need to “argue” – this is his blog so he will always assume the final word just like Rush, Hannity, and the rest of the shrill who want America to fail. And clearly, he is an excellent dodge.
Thanks very much for this article and this series–it’s so helpful to debunk these misconceptions.
One other thing the critics who cry “usury” always miss is how much we pay for other types of short term credit. A $100 payday advance with $15 fee is 391% APR.; in comparison, $100 bounced check with $55.59 NSF/merchant fee is 1449% APR; $100 credit card balance with $37 late fee is 965% APR; a $100 utility bill with $46.16 late/reconnect fees is 1203% APR; a $100 off-shore Internet payday advance with $25 fee is 651.79% APR; $29 overdraft protection fee on $100 is 755%.
Larry, it is apparent that you have no interest in honest discourse. You are too wrapped up in your own ego and ideology to seek out any kind of truth. You completely disregard all of the arguments I have made in an effort to keep your ego from dissolving in the face of cognitive dissonance.
And, in the final signal that you have lost the argument, you turn to the personal attack.
That should demonstrate to all readers that the facts are on my side, and that you are just another shrill and ignorant ideologue.
Educate yourself.
Paydayloanfacts.org
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