More Important Than Lipstick, Take 3

by hilzoy

From the NYT:

"Tracey Minda needed cash to buy clothes and school supplies for her 6-year-old son before the 2006 school year. A preschool teacher and single mother, she was broke after making her mortgage and car payments.

The quick and easy answer was a $400 loan from a payday lender. When payment was due two weeks later, she needed another loan to keep afloat. Nine months and 18 loans later, she was hundreds of dollars in debt and paying the lender about $120 in monthly fees from her $1,300 in wages.

“Once I was in the cycle for a few months, I couldn’t get out of it,” said Ms. Minda, who was on the brink of losing her car and her home in Washington Courthouse, Ohio, before turning to family members to pay off her debt.

Ohio lawmakers sought last spring to aid borrowers like Ms. Minda by capping annual interest rates for payday lenders at 28 percent, a sharp reduction from 391 percent. But lenders are fighting back in a novel way, collecting enough signatures, once certified, to force a vote in November on a ballot measure that could overturn legislation that established the rate cap.

“You can’t make a payday loan cheaper than the industry does,” said Steven Schlein, a spokesman for the Washington-based Community Financial Services Association of America, which represents lenders."

Yet somehow, banks and credit cards remain in business. I wonder how?

According to this CBS report, there are more payday lending stores than Starbucks and MacDonalds combined. They try to get people to become repeat customers:

"A former regional manager, Jent says payday lenders train their workers to set hooks.

"Incentives that you offer to customers to get them to become repeat borrowers," Jent said.

Like "take out five loans, get the sixth one free." Or offering cash to managers of low-income buildings to refer desperate tenants.

And this document, obtained by CBS News reveals that among the targets for at least one payday lender are: "single-parent households with multiple children," who are "financially stressed.""

A study (pdf) of North Carolina payday loans showed that 96% of them went to borrowers who took out more than five payday loans per year. These people are often caught in the same kind of trap as Tracey Minda: taking out loans to pay their interest, and ending up owing much more than they originally borrowed.

Personally, I think interest rates should be capped. I don't know at what level. My instinct would be: high enough to allow lenders reasonable flexibility to address different circumstances in different ways. But to my mind, 391% a year -- the average interest rate paid on payday loans in Ohio -- is way, way too high to count as 'reasonable'.

This, too, matters more than lipstick. Only one of the two candidates mentions predatory lending on his website. I might have missed something on McCain's, though I did look; but capping interest rates on payday loans seems utterly out of keeping with McCain's general economic philosophy.

Again: this matters to the 19 million households who take out payday loans (according to CBS.) It's one of the things that (according to me) we ought to be thinking about as we try to decide who to vote for.

Comments

[Incertus]

You're so elitist, wanting us to think about issues before casting our votes. Did you see John Fund on Bill Maher tonight? He was constantly talking about how the Democrats need to focus on issues too, as though John McCain has been talking about nothing else for the last two months. Made me want to punch my tv.

[liberal japonicus]

Welcome to life in Japan.

[Sebastian]

I can't really agree with you on this one. Payday lenders really do fill an important niche, and "Yet somehow, banks and credit cards remain in business. I wonder how?" is incredibly horrible logic. They stay in business by specifically not offering to the people who are using payday loans.

You don't hear about people getting their legs broken by loansharks much anymore, and there is a reason.

"Again: this matters to the 19 million households who take out payday loans (according to CBS.) It's one of the things that (according to me) we ought to be thinking about as we try to decide who to vote for."

Ok, and what do you suspect will happen to the 19 million households who take out payday loans if half of them can't get legal loans at all if you kill off the payday loaners? That is the side of the equation that liberals seem almost never to explicitly look at. Is that an important question to ask too?

[liberal japonicus]

So Sebastian, you think that it is wrong to cap the amount of interest? Here in Japan, they are going from 29% to a maximum of 20% in 2010. It really says something when the yakuza have can be more realistic than the payday loan outfits in the states.

[john b]

i may be wrong about this, but i think nc got rid of these sort of lenders (after letting the 1997 bill which allowed such lenders to sunset in 2001)

[Sebastian]

I don't make a moral judgment about capping or not capping the amount of interest. Framing it like that is the seed of awful policy.

I question the EFFECT of capping the amount of interest on those who will not be able to get loans at lower rates. I think that finding THE NUMBER of people who will not be able to get such loans at the lower rates is one of the most important parts of of judging the policy of capping interest.

Strict usury laws in the past led to illegal loansharks having an inappropriate level of power in people's lives and being annoyingly common. Declaring bankruptcy didn't protect you from them but it works wonders against legal loans.

Also I'm not certain that extrapolating the 2 week period into annual interest is really appropriate. The problem of making a short term loan small loan would I suspect have a higher percentage of overhead per dollar than larger and longer loans.

I wonder if this isn't another case of anecdotes making for bad law. But in counter anecdotes--I took out two payday loans in my student years, and it kept the lights on.

In a related vein--have you seen local government 'late fees' recently? Yikes! They delivered stuff to the wrong address for a year, and you wouldn't believe how much the price had gone up in that year. (Tripled)

[liberal japonicus]

So could you look at the proposals made by Obama and explain why they are problematic?

The problems with payday loans is also linked with the problem of loans to military personnel, something that hilzoy wrote about here and here.

[TTMYGH]

I'm sorry, but I really fail to see how this can be cited as an instance of "predatory lending", particularly given the extremely short time horizon involved. Was she expecting some windfall income in the two weeks between taking out the loan and it being due? If not, then why on earth did she think she would be in a position to pay it off? Did she, therefore, *anticipate* that she would have to get a second high-interest loan to pay off the first? If so, why is she apparently so surprised at having been drawn into a "cycle" of borrowing?

It's especially baffling considering that the solution to her problem is contained within the article itself; instead of taking out a loan that she must have known she had no way of repaying, acquiring further loans to pay off the existing debt, almost going bankrupt, and then asking her family to help ameliorate what must at that point have been a substantial sum - why did she not ask their assistance for the $400 initial amount, and avail of a spectacularly low 0% interest rate? Come to that, why could she not have spoken to the school and arranged, for instance, to borrow some books until such time as she could afford her own? Or to stagger her purchases over a few weeks or a couple of months? Are these alternatives, while certainly less than ideal, not preferable to a massive and constantly-mounting debt? The loan may have been "quick and easy", as the article puts it, but it was hardly her only or most sensible option.

I'm open to the idea that lending institutions need reform - clearly that is the case, considering the current economic climate and its provenance - but I cannot abide the lack of criticism applied to - indeed, the attitude that it is somehow *unseemly* to criticise - individuals who place themselves in this position. Payday loan interest rates ARE ridiculous, which is why they should be (1) an absolute last resort, for (2) people who are expecting a sufficient spike in short-term income to pay them off - and it's really not hard to figure out what your cashflow is going to be in a fortnight. And why are the interest rates so high in the first place? Because people are *willing to take them on*. She made an extremely foolish financial decision which lead to utterly predictable consequences, and really has little ground for complaint - sympathy yes, but not complaint. Unless, of course, we are going to take what you have accurately characterised as the McCain campaign's position over the past several months; that we should assume people to be idiots by default.

I do agree about the lipstick though. That's got to be the stupidest meme yet, in a campaign that hasn't lacked for stupidity.

[Hartmut]

Could somebody please educate the government about the unwiseness of taking loans to pay the interest on earlier loans that were taken to pay even earlier ones etc. ad infinitum (esp. when the loan shark is China)! ;-)
Seriously, the problem described is literally thousands of years old and caused more than one violent revolution*. People tend to be both stupid and desperate and the moneylenders make a living out of it. I do not know a viable solution but (without a mitigation) this is one of the most explosive political issues possible, if history is any indicator.

*and every demagogue from Catilina to Hitler made "solving the debt problem (preferably by killing the loan sharks)" a central part of his propaganda.

[eva]

I knew that moneylenders were a problem in the US (I'm from the Netherlands), but interest rates up to 391% are mind boggling.

Here in the Netherlands the government has put limits to the interest rates for these types of loans. At the moment they are at 23%. Actual rates are often much lower, between 7 and 20 per cent.

@ TTMYGH. Sure, I can understand that you think it is stupid for someone to take a loan if they have no clue how to pay it off. But many people lack your perspective, and haven't been taught what else to do. They are probably the same people who waste food money on lottery tickets, hoping they will be lucky.

It seems important that the government not only sets reasonable limits to interest rates for lenders, but also helps to educate people how to deal with scarcity, that saving money before they need it is much much cheaper than first spending the money and repaying that amount + interest afterwards.

Just like sex education can help to prevent unwanted pregnancies, financial education may help to prevent bankruptcy. It seems to me that both preventive measures may significantly reduce unhappiness and despair.

[Gary Farber]

"It's especially baffling considering that the solution to her problem is contained within the article itself; instead of taking out a loan that she must have known she had no way of repaying, acquiring further loans to pay off the existing debt, almost going bankrupt, and then asking her family to help ameliorate what must at that point have been a substantial sum - why did she not ask their assistance for the $400 initial amount, and avail of a spectacularly low 0% interest rate?"

I find it staggering that there are people ignorant enough of the life of the poor to believe that everyone has a family either able or willing to loan $400. It's damn well not an option I've had in the past couple of decades.

[TTMYGH]

Gary:

"Once I was in the cycle for a few months, I couldn’t get out of it,” said Ms. Minda, who was on the brink of losing her car and her home in Washington Courthouse, Ohio, before turning to family members to pay off her debt."

Yes, because accruing a much bigger debt and then asking her family to pay it was a far better approach for all concerned.

Any snide comments you'd like to contribute regarding the other alternatives I mentioned?

[jesurgislac]

TTMYGH: but I cannot abide the lack of criticism applied to - indeed, the attitude that it is somehow *unseemly* to criticise - individuals who place themselves in this position.

Huh. Well, that's a fairly unhelpful position to take about anyone who's got themselves into major trouble due to unscrupulousness by other people and ignorance on their own part. You say you "can't abide" any situation in which these people are not being criticised, yet - oddly - are not yourself apparently inclined to abide criticism in a pleasant spirit. Someone who advocates constant criticism of other people is someone who really ought to be able to take criticism themselves.

[TTMYGH]

jesurgislac:

You say you "can't abide" any situation in which these people are not being criticised

Well now, that's an impressive display of logical gymnastics. I said that I "can't abide" - perhaps too strong a term; "regard as inappropriate" would be better - the complete lack of criticism applied to people who have engaged in what is, objectively, extremely foolish behaviour. I noted (albeit obliquely, by reference to the necessity for reform in lending institutions in view of the foreclosure crisis, so apologies for any confusion) that this was different from other situations faced during the current economic downturn, and that cases such as this were noteworthy in large part because of the short time-period and consequent predictability involved. When someone has, to take a relevant example, signed a long-term mortgage with low initial rates which can rise to hazily-defined variable levels at a later stage - and then, some years down the line, find themselves paying far more than was originally billed as being plausible - then that is an instance wherein they can legitimately cry foul; their reasonable expectations have been violated.

That is emphatically NOT the case here. The period of the loan was only two weeks; she had complete knowledge of both the terms of the loan (I assume - if not, then her decision was even more foolish), and the amount of money she would have available when it was due. Anticipating what would happen was, literally, no more than a matter of observing that one number was significantly bigger than the other. And still she went ahead with it. It wasn't "ignorance", as you put it; it was recklessness. Are we to lay aside that fact altogether in our consideration of such situations?

Someone who advocates constant criticism of other people is someone who really ought to be able to take criticism themselves.

I'd be very interested to know by precisely what process - other than the logically-dubious rhetorical flourish noted above - you have extrapolated my desire for some acknowledgement of responsibility on the part of borrowers in cases such as this, into an observation that I "advocate constant criticism of others".

yet - oddly - are not yourself apparently inclined to abide criticism in a pleasant spirit.

If you consider Gary's criticism to have been intended or delivered in a pleasant spirit, then I can only say that we have very different definitions of "pleasant". Your post was eminently more polite - although inaccurate in its surmising of my position - and I hope I have responded in kind.

[von]

I have to agree with Sebastian that "Yet somehow, banks and credit cards remain in business. I wonder how?" is terrible logic. Payday lenders make high-risk loans that banks and credit card companies would not (and, if they can help it, do not) make. The margins in the payday loan* industry are surprisingly thin.

Now, that does not mean that payday loans are a moral good; nor is it an argument against greater regulation. But Hilzoy's bafflement is, well, baffling.

von

*Disclosure: A long time ago, I represented a payday lender in a trademark dispute.

[jesurgislac]

I said that I "can't abide" - perhaps too strong a term; "regard as inappropriate" would be better - the complete lack of criticism applied to people who have engaged in what is, objectively, extremely foolish behaviour.

That's a classic blame-the-victim line. Yes, these people borrowed money without realising that the interest charges were such that they would be unable to pay off debt and interest completely and still have enough to live on.

Their cash flow problem was created because they were not wealthy enough to be able to get a low-interest loan from a bank: and because there exist unscrupulous people who regard these people as cash cows that can be bled indefinitely, or until they lose their homes, which ever goes first.

It's not merely that these people weren't the kind of people who carefully do the arithmetic to counteract the misleading sell before they sign the loan agreement - many people aren't. It's that these people were not rich enough to be able to benefit from loans from organisations that restrict themselves to repayable interest rates, not bleed-the-sucker-dry interest rates.

So these people deserve to be criticised because they aren't natural arithmeticians: because they aren't cynical enough to think the worst of anyone who wants to lend them money: and because they're poor.

While apparently, to you, the crooks who took advantage of their need are exempt from blame - it's only their victims who ought to be criticised for falling victim to the suckers.

If you consider Gary's criticism to have been intended or delivered in a pleasant spirit

I didn't. But what difference does that make? Were you saying at any point that the criticism you demand for other people ought to be intended and delivered only in a pleasant spirit? If not, you can't expect yourself to be exempt. Who demands that others should be criticised, had bloody better be prepared to accept criticism himself and not whine about how people aren't being nice.

[TTMYGH]

The other point I originally intended to make is exactly as Sebastian and Von have outlined above; that payday loans exist, and tend to have greatly inflated interest rates, precisely because they service a high-risk niche that credit card companies and banks wouldn't touch with a ten-foot pole. Hence my description of them as "an absolute last resort, for people who are expecting a sufficient spike in short-term income to pay them off."

[Pason]

She sounds like a Service Nation employee.

Paid enough to keep her poor and job limited to a year.

[jesurgislac]

precisely because they service a high-risk niche that credit card companies and banks wouldn't touch with a ten-foot pole.

Because there exist people too poor to get loans from banks and credit card companies, and who have no alternative but to accept the massive interest rates that unscrupulous people will offer them.

This is why at least one microloan charity is extending operations to the US - with a government indifferent to the welfare of the very poorest, the poorest people in the US are effectively living in a Third World country, and need the same charitable help from other countries.

Of course, they might get help from their own country if not for the prevalence of superior SOBs who think that it's better to criticise them for being victims that to criticise the sharks who take advantage of their need.

[DWPittelli]

A small loan of $100 must be paid back with $115 in two weeks. So $400 must be paid back with $460. It is hard to imagine banks offering better rates on such small sums for such short periods, to poor people without collateral, even before you consider the number of deadbeats (people who leave town, or declare bankruptcy, or simply refuse to pay the sum back. (Try to get a lawyer for $60 or find assets to attach.)

While the math "works," it is highly misleading to take this $15 fee (15%) and multiply it by 26.1 fortnights a year and call that a 391% interest rate. This sector, like pawnshops, just will not stay in business with annualized interest rates which seem "reasonable" to middle class people.

It is also unlikely that most of these customers would be better off relying on loan sharks, or instead defaulting on their bills (paying penalties or to have their utilities switched back on, for example). Poor people will be hurt (and criminals enriched) by the good intentions of the soft-brained soft-hearted.

[Andrew]

I have seen it posited by at least two people that limiting payday loans will cause a surge in loansharking.
I'd like to see an ounce of empirical evidence for that claim. It seems ridiculous to me that, for example, the mom used in the NYT article would have turned to a loanshark to buy school supplies for her kid.

[CharleyCarp]

Count me in with Sebastian, Von and Pittelli: people take these loans because they can't take regular loans. While I'm sure that there are some people who don't appreciate the effective annual interest rate, I'm quite sure that no one taking such a loan fails to appreciate what Pittelli describes: all borrowers know they're going to have to pay more than they got.

If you had a 30% cap, that would mean that the fee on a $500 loan would be, what, $6? With the risks of default and bankruptcy, no one would makes loans like that. Fine for me, I guess, since I don't need one. But where are the millions and millions of people taking these loans supposed to get the credit they need? Microloans aren't going to work, both because of the volume involved and, more importantly, the purposes to which the money is being put: people aren't taking payday loans to invest in a new business of some kind, by and large. They're financing life, most usually, ime, expenses already incurred.

UHC would be a big help, I'm sure, but even so there will always be a class of people for whom credit of last resort is desirable.

[Bernard Yomtov]

I tend to agree with much of what Sebastian says.

The interest calculation on short-term loans is deceptive, both because it's an annualization of a very short-term rate and because it involves overhead costs.

Does it seem wildly unreasonable to charge a borrower $1 to borrow $100 for a week? That's 52%. Yet I'd be surprised if that was a particularly profitable transaction for the lender. There are administrative costs associated with making any loan. Factor them into a 30-year mortgage and they don't affect the rate very much. Factor them into a one week loan and they make it seem extortionate.

The credit risk is unclear, since default rates are stated a variety of ways.

None of that means that the borrowers aren't paying the money, of course. The difficulty is getting them access to credit through some more efficient means. There seem to be some ways to accomplish this.

Besides that I'm surprised the military can't come up with a way to provide relatively low-cost credit to its members. There can't be much default risk there.

In short, I think some encouragement of alternatives would accomplish more than a cap.

[Brett Bellmore]

"That's a classic blame-the-victim line."

I question whether somebody who borrows money knowing they have no way to pay it back can accurately be characterized as a "victim". That's like saying, "She should have looked both ways before crossing the street.", or "Using a hair dryer while in the tub was a bad idea." is blaming the victim.

While there are indeed occasions where people end up in dire straits through no fault of their own, far more common are cases where people make really stupid mistakes. I don't exempt myself, most of the troubles in my life have been due to things I did, which I should have known, or worse DID know, were foolish.

Sympathy, yes, but being relentless about pointing out the underlying mistake is sympathy for the people who might make the same mistake themselves. There's a fine line between being sympathetic and enabling.

[hilzoy]

About annualizing the rate: I did that because it's standard. That said, I'm not sure how misleading it is, given that, as noted above, 96% of loans go to people who take out five or more a year -- and 60% go to people with twelve or more loans a year. At those levels of borrowing, annualizing seems to me precisely appropriate: someone who's borrowing 12 times a year is probably stringing loans together, using one to pay off the last one.

Also: fwiw, I said nothing about my attitudes towards the people who take out these loans and get into debt traps. (The people who take out these loans and pay them back and don't get into debt traps, like Seb, are presumably fine.)

The reason is not that I think they're above criticism. It's because while I do think it's important to think about the question, What should policy be here? And who is most likely to set it correctly?, I do not think it's particularly important for me to arrive at a judgment of the character of people who take out these loans. Really, nothing turns on my opinion of them.

My opinion is that it's probably dumb, in a lot of cases, for them to do what they did. That said, a lot of people do dumb things.

According to the CBS story cited in the post, "six states - Arkansas, Georgia, New Hampshire, North Carolina, Ohio and Oregon as well as the District of Columbia - have now effectively banned these loans". The Center for Responsible Lending studied (pdf) people in NC after the ban (focussing on people who would have been likely customers, demographically.) Of people who had recently had a financial shortfall, most were unaware that payday lending had been banned, and of the rest, over 3x as many said that banning it had had a positive effect on their households. Among former payday loan customers, most were unaware, but (here the numbers are way too small to mean much, I offer them for illustrative purposes) 5 said the ban had had a positive impact on their households, compared to 2 for whom it was negative.

[jesurgislac]

Brett: I question whether somebody who borrows money knowing they have no way to pay it back can accurately be characterized as a "victim".

I question whether the people who take out payday loans and fail to pay them back do so knowing they cannot pay them back.

While there are indeed occasions where people end up in dire straits through no fault of their own, far more common are cases where people make really stupid mistakes.

I question your equation of "stupid mistake" with "fault". I especially question it with the existence of unscrupulous people encouraging others to make stupid mistakes...

[jesurgislac]

People who take payday loans are people who need money badly.

The example Hilzoy used was a woman who couldn't afford to buy clothes and school supplies for her son.

I notice with interest that three out of the four people who have spoken up declaring that the important thing is not to ensure that a working single mother is financially supported so that she can afford to provide for her child, but to criticise her financial decisions - are Von, Brett, and Sebastian: all of whom have declared they believe in forced pregnancy. They didn't believe this woman ought to have had the right, seven years earlier, to decide to have the baby: they have all claimed that they feel strongly about protecting "innocent unborn babies" - but not one of them appears to feel strongly that, once that "innocent unborn baby" gets to be six years old and going to school, he and his mother ought to have their support.

Interesting, that, isn't it? The point at which pro-lifers quit supporting those cute little babies clearly occurs at some point between birth and six years old.

[liberal japonicus]

Count me in with Sebastian, Von and Pittelli: people take these loans because they can't take regular loans.

So Obama also proposes the following (from hilzoy's link in the post)

# Cap Outlandish Interest Rates on Payday Loans and Improve Disclosure: Obama supports extending a 36 percent interest cap to all Americans. Obama will require lenders to provide clear and simplified information about loan fees, payments and penalties, which is why he'll require lenders to provide this information during the application process.
# Encourage Responsible Lending Institutions to Make Small Consumer Loans: Obama will encourage banks, credit unions and Community Development Financial Institutions to provide affordable short-term and small-dollar loans and to drive unscrupulous lenders out of business.

So it sounds like he realizes the objection that is raised and proposes steps to make sure that it is not a problem

The line 'extend the 36% interest cap to all Americans' refers to the interest cap enacted in the 6 states mentioned. This NPR story ends with a very interesting point about military payday loans, which is

Maj. Gen. Michael Lehnert, head of Marine Corps Installations West, said this is a priority for the military because high debt affects Marines' ability to deploy.

"We need every Marine we can get. We want them to go forward with their heads in the game," Lehnert said. "We don't want them to have to worry about whether they can make their car payment when they're in Fallujah."

[Bernard Yomtov]

hilzoy,

Yes, annualizing is standard, but that doesn't mean it can't distort things. This is especially so when administrative costs make up a large part of the loan cost.

[bedtimeforbonzo]

Gary: "I find it staggering that there are people ignorant enough of the life of the poor to believe that everyone has a family either able or willing to loan $400."

I have five bills on my dresser at home right now: cable ($200), two credit cards ($600 and $300), the second mortgage ($400) and car ($400).

My wife does her part, using the money from her job to pay for groceries and everything and anything that our 9-year-old needs. She will come up with what she can -- maybe $300 -- to help out with the aforementioned bills.

I just tapped out my checking account the other day for prescriptions, my final $60.

So to pay off all of those bills, I will use my remaining credit card with available credit. And on it goes.

My family options are limited -- Mom is on Social Security; my brother who lives with her is on SS Disability.

My paycheck yesterday was $58; the week before that: $68. The life of a commissioned salesman.

We just had our Saturday sales meeting: sell 10 cars this month or you're done.

Sold 13 in July; 3 in August; 2 so far in September. So who knows? Give me a customer, and I know what to do; lack of customers have been the problem, but tell that to ownership, constantly in denial.

Sorry for all of the detail. But I'm supposed to be middle class.

There is no middle class.

[TTMYGH]

jesurgislac:

Ah, I see we're adopting the time-honored "ignore 85% of the preceding post's reasoning" approach. I assume, at minimum, that you're withdrawing your accusation that I demand constant criticism of everybody who's not me, all the time? Anyway, this is a consolidated reply to your two posts.

So these people deserve to be criticised because they aren't natural arithmeticians: because they aren't cynical enough to think the worst of anyone who wants to lend them money: and because they're poor.

... right. So as I understand your argument, people who don't bother to do even the most fundamental, ten-minute appraisal of their financial situation before embarking upon an inherently risky enterprise - particularly when the ramifications of said decision could be very serious for them - nonetheless deserve no scrutiny whatsoever when the entirely predictable consequences unfold? And really... not "natural arithmeticians"? Not "cynical enough to think the worst of anyone who wants to lend them money"? Do you genuinely regard poor people as ignorant rubes, or is this just a convenient line of attack at the moment?

FWIW, the woman in the original article is an Ohio preschool teacher, and thus - to the best of my Googling ability - would therefore be required to hold at least a Bachelor's degree (open to correction). Are you seriously arguing that she was incapable of working out how much the loan would cost, and how much she would be able to pay?

Their cash flow problem was created because they were not wealthy enough to be able to get a low-interest loan from a bank

See my previous comment.

Because there exist people too poor to get loans from banks and credit card companies, and who have no alternative but to accept the massive interest rates that unscrupulous people will offer them.

Care to comment on the alternatives I outlined in my first post?

While apparently, to you, the crooks who took advantage of their need are exempt from blame - it's only their victims who ought to be criticised for falling victim to the suckers.

Absolutely not; I think Hilzoy covered the objections to the system quite well in her post. But to refuse even to acknowledge the role played by reckless borrowers in producing stories such as the one above - to regard them as hapless victims, with no agency of their own - is to display a rather cavalier attitude towards intellectual honesty. Payday loans, as Sebastian outlined earlier, can be useful when handled with even the most minimal regard for financial reality; and, as I said in my original post, the reason that their interest rates are so exorbitant is because people are willing to take them on, even in situations as blatantly foolish as this.

This is why at least one microloan charity is extending operations to the US - with a government indifferent to the welfare of the very poorest, the poorest people in the US are effectively living in a Third World country, and need the same charitable help from other countries.

Hmmmm, this places me in something of a quandary. I think this is a good thing, and yet somehow feel a responsibility to maintain the crude poor-hating persona you have constructed for me. Awkward!

Who demands that others should be criticised, had bloody better be prepared to accept criticism himself and not whine about how people aren't being nice.

I'll keep that in mind.

Of course, they might get help from their own country if not for the prevalence of superior SOBs who think that it's better to criticise them for being victims that to criticise the sharks who take advantage of their need.

Up yours too, buddy. See? I'm learning!

Hilzoy:

The reason is not that I think they're above criticism. It's because while I do think it's important to think about the question, What should policy be here? And who is most likely to set it correctly?, I do not think it's particularly important for me to arrive at a judgment of the character of people who take out these loans. Really, nothing turns on my opinion of them.

I have no desire to make judgements on the characters of borrowers who get in over their heads; the woman from this story might be, for all I know, a lovely person, and her case is very sympathetic. My point is merely that some acknowledgement of the role played by the kind of recklessness she displayed is warranted in thinking about this system, how it is perpetuated, and how best to tackle it. For instance, the microloan organisation that jes linked to offers advice on loans and financial planning; eva suggested something similar earlier. Approaches such as these may prove effective in reducing interest rates, by slashing the payday agents' clientele; they would, at minimum, produce a better system than a cap alone.

[TTMYGH]

The last line in my comment above would be more accurately rendered as "produce a better outcome than a cap alone", insofar as it would result not only in an improved system, but - hopefully - more astute clients thereof.

[Mike Schilling]

The solution is simple; don't reward people who engage in this sort of behavior.

Fannie Mae's Daniel Mudd and Freddie Mac's Richard Syron stepped down. [...] By conservative estimates, Mudd, 49, and Syron, 64, will leave with an additional $7.3 million and $6.3 million, respectively, as part of a severance package, according to an analysis by Paul Hodgson at the Corporate Library.

[Doug H. (Fausto no more)]

The personal savings rate is falling off of its post-tax rebate bloom and headed back to sub 1% levels again. The average American household owes more than 20% than what it makes in a year. The government just had to de-privatize Fannie Mae and Freddie Mac, and WaMu is on life support.

In an environment like this, offering instant McLoans to anyone and everyone doesn't sound to me like the way back to national solvency.

[KCinDC]

I agree that the overhead is higher relative to the loan amount for a two-week loan than for a multiyear loan. But that part of the overhead should be independent of both the time of the loan and the amount. Therefore it should be a fixed one-time fee per loan, regardless of the loan amount or how long it takes to repay, not a percentage of the amount or a weekly charge. Then a more reasonable interest rate can be added on top of that.

Is that how the costs are actually structured? If so, the objection to converting it to an annual interest rate seems valid. If not (as I suspect is the case), then it's not misleading.

[justcorbly]

I'm always stunned and dismayed when I see payday lending defended on free market grounds, describing it as a service for people who lack credit cards.

It's usury. Interest rates of 391 percent are not necessary and are ciminally excessive.

The business model bears a great resemblance to sharecropping, which trapped poor farmers into a cycle of forced purchases on credit.

[bobbyp]

..."that payday loans exist, and tend to have greatly inflated interest rates, precisely because they service a high-risk niche that credit card companies and banks wouldn't touch with a ten-foot pole."

Precisely the same logic used by a heroin dealer defending his business model.

[bobbyp]

"The solution is simple..."

Yes. Fewer poor people, please.

[jesurgislac]

TTMYGH: Care to comment on the alternatives I outlined in my first post?

Certainly not. You asserted that you "can't abide" a complete lack of criticism of poor people who need more money for essentials than they're able to earn, and sheesh: I just don't think I can provide the level of criticism you say you want directed at others, while you feel that people shouldn't criticise you.

justcorbly: The business model bears a great resemblance to sharecropping, which trapped poor farmers into a cycle of forced purchases on credit.

Yeah, same deal. I'm sure that people who had never been in that situation were happy to criticise the poor farmers, too, and annoyed with people who didn't...

[Chris Crawford]

A few thoughts that I didn't notice in the comments:

1. The original post noted that there are a great many payday loan operations in the US. From that fact we can conclude that the market for payday loans is competitive; from that we can conclude that the interest rates are at the lowest level that permits a decent rate of pay for the operator. Ergo, capping interest rates will serve only to put these operators out of business and remove this source of loan from the poor.

2. One possible justification of such a cap would be to eliminate a self-destructive behavior. If you regard payday loans as intrinsically damaging to the borrower (a big if), then restricting them is no different than, say, restricting gambling or pyramid schemes.

3. Perhaps a better solution would be federal legislation encouraging employers to provide payday loans under some standard scheme. Employers have a form of security that the payday lenders don't have: they simply dock the employee's wages. That greatly reduces the cost of the loan.

[Cabalamat]

Sebastian: Payday lenders really do fill an important niche, and "Yet somehow, banks and credit cards remain in business. I wonder how?" is incredibly horrible logic. They stay in business by specifically not offering to the people who are using payday loans.

Indeed. I'm not an expect on the banking industry, but I suspect that banks and credit cards have lower overheads than people offering short term loads of small amounts of money to customers who're bad credit risks.

Let's take Hilzoy's proposition -- that lenders can lend to these types of people at vastly lower interest rates and make money -- as true. If it's true, then one could presumably profit by setting up a firm doing so, undercutting the existing lenders, and making lots of money. Of a credit union doing the sasme thing. Or maybe something like microlending over the Internet (a bit like Kiva).

[von]

I notice with interest that three out of the four people who have spoken up declaring that the important thing is not to ensure that a working single mother is financially supported so that she can afford to provide for her child, but to criticise her financial decisions - are Von, Brett, and Sebastian: all of whom have declared they believe in forced pregnancy.

I literally have no idea what this means, or why it applies to me. All I wrote was:

"I have to agree with Sebastian that "Yet somehow, banks and credit cards remain in business. I wonder how?" is terrible logic. Payday lenders make high-risk loans that banks and credit card companies would not (and, if they can help it, do not) make. The margins in the payday loan* industry are surprisingly thin.

"Now, that does not mean that payday loans are a moral good; nor is it an argument against greater regulation. But Hilzoy's bafflement is, well, baffling."

[Footnote omitted.]

[Incertus]

You don't hear about people getting their legs broken by loansharks much anymore, and there is a reason.

The way some of these companies work, the police become the legbreakers for modern loan sharks. A friend of mine worked for one in Louisiana, and it worked like this: you wrote a post-dated check for the amount of the loan and the interest. When it came due, the company either deposited the check, or you brought in another one, with another origination fee attached. Quite often, there would be some miscommunication between the company and the borrower, and the check would bounce--and the check would happen to be just above the local limit for a felony. Then, if there were any question about who was getting what money, the sheriff's office would show up at the borrower's house with an arrest warrant. So please, let's not act like much has changed here from the days of loan sharks and legbreakers.

[Incertus]

I agree that the overhead is higher relative to the loan amount for a two-week loan than for a multiyear loan. But that part of the overhead should be independent of both the time of the loan and the amount. Therefore it should be a fixed one-time fee per loan, regardless of the loan amount or how long it takes to repay, not a percentage of the amount or a weekly charge. Then a more reasonable interest rate can be added on top of that.

What the payday loan defenders in this thread seem to be ignoring is that the interest, while excessive, isn't where these people make their real money. They make it in origination fees, and renewal fees, and in tons of other fees. Hidden costs to the borrower are what really get them trapped in this cycle. The high interest is like getting kicked in the junk after you've been mugged, just because the mugger has you down and feels like it.

[Chris Crawford]

So please, let's not act like much has changed here from the days of loan sharks and legbreakers.

Whoa! There's a GIGANTIC difference between breaking somebody's legs and using the law to resolve disputes. We have laws precisely to prevent the sort of personal justice that loan sharks relied upon. And there is nothing, absolutely nothing wrong with resorting to criminal law to enforce contracts.

[Chris Crawford]

What the payday loan defenders in this thread seem to be ignoring is that the interest, while excessive, isn't where these people make their real money.

OK, the lenders add all sorts of other fees. If their additional fees are in any way hidden or misrepresented, then they have broken lending law and should be prosecuted for that. If, however, they are honest about those fees, then there's nothing wrong with them. And the fact that their market is intensively competitive insures that their overall fees, whatever they are, have been driven as low as is practically possible.

[mattH]

3. Perhaps a better solution would be federal legislation encouraging employers to provide payday loans under some standard scheme. Employers have a form of security that the payday lenders don't have: they simply dock the employee's wages. That greatly reduces the cost of the loan.

NO. Absolutely not. People are already tied to their jobs in a myriad of other ways, from health care to other opportunity costs. Horrible horrible horrible.

We just had our Saturday sales meeting: sell 10 cars this month or you're done.

Sold 13 in July; 3 in August; 2 so far in September. So who knows? Give me a customer, and I know what to do; lack of customers have been the problem, but tell that to ownership, constantly in denial.

Management by threat. Always a favorite. I really hope things get better for you bedtimeforbonzo.

[Sebastian]

"Therefore it should be a fixed one-time fee per loan, regardless of the loan amount or how long it takes to repay, not a percentage of the amount or a weekly charge. Then a more reasonable interest rate can be added on top of that.

Is that how the costs are actually structured? If so, the objection to converting it to an annual interest rate seems valid."

Payday loans typically have an administrative fee (usually 10 or 15 dollars) plus an interest fee. From the math it looks to me like it looks to me like the fee creates a very large portion of the scary rate. (Payday loan of $400 for 2 weeks with $15 fee and ZERO interest would work out to an annualized rate of about 97%. On $300 that would be about 130%.)

[KCinDC]

What the payday loan defenders in this thread seem to be ignoring is that the interest, while excessive, isn't where these people make their real money. They make it in origination fees, and renewal fees, and in tons of other fees.

If these other fees are not being included in the calculations that produce the extraordinarily high numbers for interest rates, then Sebastian's objection that the calculations are misleading seems to be invalid. Are they being included?

[Chris Crawford]

MattH, you object to my proposal for federally encouraged payday loans from employers, on the grounds that this would tie people to their jobs even more tightly than they currently are. I think you have it backwards: the employee would be able to take the money and run by simply quitting after receiving the payday loan. The biggest problem with my idea arises from the need to provide employers with some sort of protection against such behavior. (There are a number of other problems as well, but your objection is not one of them.)

[mattH]

I should clarify though that many businesses will agree to rare paycheck advances, which, not being loans, don't have that problem. If we are going to have an employer do something, this is a much better approach. Besides, if they are a "flight risk", the employer can always deny the advance, whereas if we get them in the business of payday loans, we create a much more antagonistic relationship between the two, potentially impacting the business itself if things turn sour.

Plus, it means that they'll be creating entire departments around a bank model that operates in it's own interest, not that of the overall business model. Seems like a bad idea all around.

[justcorbly]

There's a GIGANTIC difference between breaking somebody's legs and using the law to resolve disputes. We have laws precisely to prevent the sort of personal justice that loan sharks relied upon.

You seem to be missing the point.

Loan sharks use violence to compel payment of illegal loans. Payday lenders, at least in that one jurisdiction, use the local cops to compel payment of what ought to be an illegal loan. All I see are scumbag lenders suckering poor people into taking out usurious loans and relying on the threat of the cop at the door as their enforcers.

In other words, payday lenders are loan sharks who have replaced thugs with cops.

[Phil]

I think you have it backwards: the employee would be able to take the money and run by simply quitting after receiving the payday loan.

Hahahahaha. HAAAAAhahahahahaa. Ah hahahahaha.

Excuse me.

BWAAAAAAAAAAAAAAAhahahahahaha!

Think about this for, like, two seconds. If there were any risk of this actually occurring on any sort of regular basis, the number of employers willing to institute any such program would be equal to zero.

And if it did occur on any sort of regular basis, you know what companies really aren't into? Letting people just take money from them and run. The repercussions that anybody who did this would face would make a payday lender look like Big Rock Candy Mountain.

[Feddie]

Hilzoy-

I apologize for threadjacking here, but if you wouldn't mind posting an update to let everyone know that Publius and his family are o.k., I would greatly appreciate it.

[bedtimeforbonzo]

"Management by threat. Always a favorite."

Cannot. Understand. That.

Never have.

Things are bad for me, but I'm sure they are much, much worse for many others.

I think my situation and this payday phenomenon is a sympton of the larger economy as a whole.

And I often wonder if the candidates -- John McCain, of course, but also Barack Obama -- know just how bad it is for so-called regular working people. Politicians always make it sound like tax cuts are a cure-all, and I think it's going to take much more than that.

Thanks, mattH.

[Chris Crawford]

Payday lenders, at least in that one jurisdiction, use the local cops to compel payment of what ought to be an illegal loan.

OUGHT to be illegal? It isn't illegal, it's perfectly legal. It's an enforcement of a contract that was entered into voluntarily and knowledgeably by both parties. Do you believe that contracts should not be enforceable?

Look, if we're going to have a society, we're going to have disputes between people. How do you propose to settle those disputes, if not by law?

Phil offers derision against my arguments, but the logic he follows up with ignores what I wrote. He writes:

If there were any risk of this actually occurring on any sort of regular basis, the number of employers willing to institute any such program would be equal to zero.

completely ignoring my statement:

The biggest problem with my idea arises from the need to provide employers with some sort of protection against such behavior.

Can we please just set aside the bombast and ridicule and concentrate on the logic?

[CharleyCarp]

Best of luck, BedTime.

Some unsolicited advice: I find that not having cable has both financial and medical benefits. ;-)

[John Thullen]

Hi!

I wonder if the managers of the pay-day loan institutions are "incentivized" to stay late at night and reduce the number of hours their pay-day loan employees have logged, or maybe fudge whatever commissions their employees have earned.

If Wal Mart and restaurant managers feel free to engage in this type in the current American environment, why not pay-day loan employers, too?

The upside of course is that the employees would be "incentivized" to become borrowers from their own employers, thus hiking up the sales numbers this month.

I don't see how the "incentives" described in the CBS report to increase lending can't be viewed as predatory. Salespeople are incentived to be predatory, kids. Wolves always smile before they eat you and offer that useless undercoating.

And the charmingly named "Community Financial Services Association of America" knows very well that they are representing predatory behavior. Titles like that are mulled over to hide intent, not reveal it.

Please!

The Black Hand was a nickname. Their business cards carried the more anodyne "The Society for the Preservation of Sicilian Neighborhood Values".

I am disappointed in Sebastian, he said on the lighter side, letting himself go to such an extent that he need a payday loan. I don't know how a guy can get so over-extended on lentils.

What, you thought you'd splurge on a hambone to add flavor?

I was told by a stockbroker friend years ago when I expressed an interest in the profession that the point of his job was to make sure all of his clients money became his money.

Actually, lipstick on pigs is very important. Out of Obama's mouth, these words threaten the marginal pig vote. You can't win an election with just the wolf vote.

John McCain knows he must carry the pigs-who-wanna-be-wolves-vote.

Church charities and predatory lenders: the Republican methods of eliminating taxes and social spending.

[bedtimeforbonzo]

Thanks, CharleyCarp. Actually I worded that wrong -- I always say that $200 is for cable when actually it is cable/internet/phone (Comcast's triple play).

[bobbyp]

"It's an enforcement of a contract that was entered into voluntarily and knowledgeably by both parties."

That depends. The assertion\premise that this is a bi-party "contract" in any meaningful sense in the generally accepted use of that term is at the heart of the matter (cf "sharecropping" and "heroine" above).

[Dbn]

Precisely the same logic used by a heroin dealer defending his business model.

An apt, if perhaps unintentional, comparison. The choice is not between low-interest legal loans for people with poor credit and high-interest legal loans for people with poor credit. It is between open, regulated high-interest lenders and black market high-interest lenders.

There is a demand for these loans, eliminating legal providers will simply move the market underground. Ironically, the people who will suffer the most are the ones you are most interested in protecting, just as it is drug addicts, not dealers, who suffer the most from impure dope and dirty needles.

[Incertus]

Whoa! There's a GIGANTIC difference between breaking somebody's legs and using the law to resolve disputes. We have laws precisely to prevent the sort of personal justice that loan sharks relied upon. And there is nothing, absolutely nothing wrong with resorting to criminal law to enforce contracts.

In this case, not really. You're threatening the borrower with a physical response--legbreaking versus incarceration--unless the borrower makes good on the loan. That one is legal and the other is extralegal makes no substantive difference. Factor in that in both cases you have a predatory lender looking to take advantage of a person who has limited other options, and those differences get ever smaller. We're talking about a difference of style, not of kind.

[lightning]

You load sixteen tons, and what do you get?
Another day older and deeper in debt.
St. Peter don't you call me 'cause I can't go,
I owe my soul to the company store.

Yah, the problem's been around for a while ...

[The Crafty Trilobite]

bedtimeforbonzo, good luck! I'm sorry to hear about your troubles. I'm not as bold as you in sharing details of my finances, even psuedonymously, but my income-outgo balance is not much better than yours, and prices keep rising. Fortunately, debt maintenance rates are fixed...but every time a medical bill has to go on credit card, there's a little extra cost per month, and so it goes. I am not in immediate danger of losing my job, but I have a ferocious race to run over the next 2-3 years before up-or-out time.

Re payday lenders:
The laissez faire arguments for usury prove too much. A contract for indentured servitude would also be fair, market-driven, freely entered into, and only necessary in emergency. But we don't allow them, because not every free deal is good policy. Y'all correctly point out that the borrowers usually have nowhere else to go (tho Ms. Minda apparently had alternatives). But by the same reasoning, Jean Valjean had no reasonable alternative but to steal bread for his children. Hugo spent several hundred pages pointing out that the solution to Valjean's dilemma was not to condone theft on a case-by-case basis, nor to imprison millions, but to fix the system so that Valjean has better choices. If payday loans are outlawed, will this leave more people destitute forever, force them into wiser habits (because they know that particular safety net isn't there), or force all of us to generate some better solutions -- more welfare, more reasonable loan institutions, debtors' prisons, bankruptcy reform, more collective bargaining power, whatever? Legitimizing usury is probably not the best answer we can come up with, it's the lazy, greedy answer. If we are using usury so much that outlawing it would send serious shocks through the economy, that is a good sign that we are on the wrong road.

There is also real doubt, by the way, that the worst of the terms of payday loans are in fact entered into freely. The law recognizes that fraud or extreme overreaching means there was no true consent -- but those laws do not help people who do not know their rights or cannot get to court. A common pattern is, loans are made on a revolving basis, renewed each week or month, and the lender changes the terms in a clause buried in fine print on the back of one of the loan renewal vouchers, with no other notice to the borrower. Another loan term puts any disputes into arbitration before an arbitral panel of the lender's choice, often in another state. In practice, the borrower has no recourse against unlawful contract terms or formation, because he cannot get them in front of a fair court.

[jesurgislac]

John Thullen: The Black Hand was a nickname. Their business cards carried the more anodyne "The Society for the Preservation of Sicilian Neighborhood Values".

...is a hero of the revolution.

[ThatLeftTurnInABQ]

The background story is depressing and yet not terribly surprising.

I think Sebastian made a reasonable point that if you effectively shut down this business by capping rates, it will go underground in some form or another, probably in a bad way. Analogies with abortion come to mind on that score.

Those who say “let her borrow from friends or family” are overlooking another problem with that solution – it will spread the financial stress to other families who may be just barely making ends meet now but can’t afford to carry the load for other people whom they nonetheless will be unable to refuse for social reasons which override the fiscal ones. That could lead to violence – most assaults are between people who know each other in some capacity, and when I contemplate the potentially combustible mixture of booze, guns and bad debt within an extended family, it doesn’t sound like a recipe for a happy ending (not in this specific case, but more generally for some of the people who find themselves in these straits).

I think we are again dealing with symptoms here, in the same way as the discussion of GSEs and mortgages the other day. The root problem is a lack of income. When I read this story and put together “needed cash to buy clothes and school supplies” and “A preschool teacher” my immediate thought was of Henry Ford thinking that he needed to pay his workers enough so they themselves could afford to purchase the product coming off the assembly lines they were manning.

How is it that a teacher cannot afford the expense of sending a single child to school with adequate clothes and supplies?

Is this not Henry Ford's workers redux?

Is this not a shocking indictment of what has happened to wages in this country for working class people?

[Dbn]

In this case, not really. You're threatening the borrower with a physical response--legbreaking versus incarceration--unless the borrower makes good on the loan.

You don't get incarcerated for failing to pay back a loan. Civil penalties do not include imprisonment.

[Fledermaus]

chris, it is an illegal loan full stop, no one bothers to enforce usury laws. Also there is a difference between useing the law to collect a defaulted loan and convicting them of a felony crime if they don't pay. That people are actually defending a de facto 300% intrest rate is stunning

[Incertus]

You don't get incarcerated for failing to pay back a loan. Civil penalties do not include imprisonment.

But you can go to jail for passing a bad check, which is what the people I was talking about would be charged with if they didn't either make a new loan or make good on the old one.

[KCinDC]

Dbn, read the comment by Incertus above that started this subthread. The charge is not failing to pay back the loan.

[Fledermaus]

and it's your taxes paying for the incarceration for a private loan. Debtors prisons ain't free just ask England how those worked out

[bobbyp]

"An apt, if perhaps unintentional, comparison."

Nice try. Both models are built on the goal of building a profitable customer base built on the attribute of addiction.

Please do continue.....

[Chris Crawford]

I heartily agree with the comments that it is the underlying unfair situation that needs to be addressed, not the symptom of the payday lender. I would much rather alter our society so that the Gini Index is much reduced. A high Gini Index is corrosive to social comity. So yes, let's make the more fundamental changes necessary to pull the rug out from under payday loans. But let's not attack the symptoms. Payday loans fill a genuine need and, if society will not address that need, at least payday loans provide a band-aid solution. Ripping off the band-aid doesn't help anybody.

I also agree that the ugly realities of poor enforcement of lending laws casts a shadow on the whole industry -- but I'll add that just about EVERY commercial transaction involves some degree of this kind of sliminess. That's one reason why government intrusion into the marketplace is so difficult to make effective: you simply don't have the wherewithal to enforce many such laws. Again, attacking the underlying problem is a more effective approach than patching the symptoms.

I continue to disagree with the claim that enforcing the law is a form of physical response different only in style from private revenge. The law is the only civilized way to handle disputes. You can't just wish disputes away; you've got to have a civilized means of resolving them, and the law is that means.

But for the third time, I will emphasize that solving the underlying problem of the high Gini Index is the best strategy for solving the payday loan problem.

[Sam]

That's a classic blame-the-victim line. Yes, these people borrowed money without realising that the interest charges were such that they would be unable to pay off debt and interest completely and still have enough to live on. Their cash flow problem was created because they were not wealthy enough to be able to get a low-interest loan from a bank: and because there exist unscrupulous people who regard these people as cash cows that can be bled indefinitely, or until they lose their homes, which ever goes first.

[bedtimeforbonzo]

The Crafty Trilobite: "I am not in immediate danger of losing my job, but I have a ferocious race to run over the next 2-3 years before up-or-out time."

I think I'll be fine with the job, even if I don't hit the "mandated" 10 (although I need to do that just to keep my head above water). I am very close to the GSM and he tells me there are two guys with bigger bull's-eyes on their back than me. I just don't like the whole let's-crack-the-whip-and-they'll-do-better mentality. I am astonished after five years in the car business that ownership pretends to be immune to market conditions (to their employees at least).

I think the only way I would turn to a payday loan place is if it meant putting food on the table, paying the utility bill or something like that. (Don't have any sympathy for folks who frequent these places to have money to go to the local slots parlor, which does go on, and other such nefarious things.)

[justcorbly]

Do you believe that contracts should not be enforceable?

Don't believe I said that. Besides, a contract involving criminal activity is not enforceable.

I said payday lending should be illegal.

Attempts to give it some kind of backdoor respectability by going off on tangents about enforcing contracts or police detaining alleged felons, or by taking refuge in something lifted from Econ 101, are not convincing arguments for the legality of that trade.

Rather than sending the cops to arrest people suckered by payday lenders, we'd be a better society if we could send the cops to arrest the payday lenders.

[Chris Crawford]

Me: Do you believe that contracts should not be enforceable?

justcorybly: Don't believe I said that.

That's why I asked.

Your basic argument is that, in your opinion, payday loans should be illegal, therefore they are not legal. If you want them to be illegal, then you need to go through the legislative process. But payday loans are currently legal and therefore contract enforcement is the only proper response.

When payday lenders break the law, they should be prosecuted. I agree that such prosecutions are not common enough. But enforcing the laws against illegal loans no more imperative than enforcing the law against passing bad checks. Both practices are illegal and both should be prosecuted.

[KCinDC]

Chris Crawford, while I support enforcing the law against passing bad checks, I'm not sure I'd put a great deal of priority on enforcing it when the bad checks are being passed to people who know very well that the checks they're coercing people into writing are extremely likely to be bad.

[russell]

there are more payday lending stores than Starbucks and MacDonalds combined

and

96% of them went to borrowers who took out more than five payday loans per year

It's interesting to talk about why lending stores need to charge an annualized rate of almost 400% to cover the cost of short-term, high risk loans. I can see their point of view, they need to cover their risk and make a dollar.

It's also undeniable that the practical effect of lending stores and check cashing places is to further impoverish people who are already hard pressed to keep their heads above water.

I'm not sure the blame for this can be placed at the feet of the lenders. They are providing a service that is, apparently, necessary. Almost all folks who use it use it several times a year. That means it's a NORMAL PART OF THEIR ECONOMIC LIFE. It's not an exceptional situation, nor is the normal case folks who do this once or twice while in grad school.

As an aside I will offer my opinion that experiencing transient episodes of short funds while in grad or professional school DOES NOT COUNT as a realistic example of the experience of being poor. Just my two cents.

The problem is that a hell of a lot of people in this country are having a very hard time keeping up. That set of people extends well beyond irresponsible knuckleheads and dumbass f*ckups, and now includes serious, responsible, hard-working people who are quite simply getting squeezed.

The solution that we, as a nation, appear to be offering our countrymen and women is an emerging private market of lending that inevitably will drive many of them further and further into poverty and debt.

I guess we can blame the lenders, and I'm quite sure many of them deserve some blame for making their dollar off the backs of folks who are just struggling to get by.

But if the best solution we can come up with is to keep the lending rates somewhere just south of blatantly, vampirically predatory, I think we have much, much bigger problems on our hands.

This country is falling apart at the seams, and folks want to argue about whether it's fair to criticize the folks who are bearing the brunt of that, and who are just trying to keep their heads above water, for being feckless and lazy. Go ahead and criticize them if that makes you feel better, but it won't make the basic situation any better or worse. They're still going to have to try to keep the lights on, so the lenders are still going to have a market.

Major financial institutions are being nationalized because if they are not they will tank and take the entire economy down with them. Personally, I think talking about how irresponsible Tracey Minda is for trying to get her kid some school clothes is kind of beside the point.

Payday lenders are the toxic mold growing on the rotten heart of our bankrupt, hollowed out economy. We can poor some bleach on them, but the wood's still rotten.

These people are our neighbors. We better freaking take care of them, because we're next.

Thanks -

[justcorbly]

...in your opinion, payday loans should be illegal, therefore they are not legal...

Not what i said, either.

BTW, they are illegal in my state.

[Bernard Yomtov]

The root problem is a lack of income.

TTL has it right. The problem is the lack of income and the resulting lack of access to reasonable credit to enable Minda to meet a short-term financial need.

To express doubt that putting a cap on lenders' rates is going to do much to solve the problems faced by people like Minda is not a sign of Scrooge-like indifference. It is just looking at some plausible consequences of such a cap, and asking how much it would really help.

This is not the sort of laissez-faire argument rightly criticized by Trilobite. It's the argument that the cap actually might not do much good. Some people will get loans at lower rates, and benefit. Some will get loans and still get into deep trouble. It's not like 36% is a bargain. Others will not be able to get legal credit at all. Maybe that all nets out to the good, but it doesn't have to.

[hilzoy]

btfb: Yikes.

John Thullen: you have returned!

(I actually met John Thullen in Denver. He's the first person I've met from ObWi who wasn't more or less as imagined, since when my imagination tried to come up with something John Thullen might be like, it just sort of wilted at the very thought. So I had nothing to compare the actual Thullen to. But very nice and very funny, as one might imagine, if one's imagination were braver than mine.)

[justcorbly]

To express doubt that putting a cap on lenders' rates is going to do much to solve the problems faced by people like Minda is not a sign of Scrooge-like indifference.

Agreed. But a rate cap at something an order of magnitude below 391 percent would certainly result in fewer people being ruined by this scam. The societal costs incurred by those who find themselves trapped by payday loans are real.

I'd prefer we just outlaw it nationwide.

[justcorbly]

Come to think of it, does anyone know how many people take out payday loans to pay for health care they would otherwise have neglected?

[Chris Crawford]

I very much agree with the arguments that we are being pennywise and pound foolish in attacking this problem. The payday loan people are not getting rich on this commerce; they are small operations, not giant banks. The ripoffs done by the large corporations are much greater in effect than the payday lenders. The difference is that the effects of the payday lenders are immediate and obvious, whereas those of the big corporations are diffused throughout the whole system. For example, the takeover of Freddie Mac and Fannie Mae will cost taxpayers billions and billions of dollars, probably more than the entire take of the payday loan industry. The collapse of Enron stole billions from the middle class.

One of my neighbors, a really sweet old man, lost the bulk of his retirement savings in that collapse. Over the years he has grown steadily more despondent, and recently lost his temper and struck another person, doing some significant injury. Here's a man who has done nothing but contribute to society for an entire lifetime, and then he has had all that taken away by some crooks at a big corporation, and it has ruined his life.

We are wasting our time worrying about these lenders. They're not doing much real damage. The big task is to crack down on the practices of the wealthy. The rich get richer, and the poor get poorer -- that's the iron law that we must controvert.

[xanax]

hilzoy... you tease... pix? scan of the bar tab?

[Chris Crawford]

a rate cap at something an order of magnitude below 391 percent would certainly result in fewer people being ruined by this scam. The societal costs incurred by those who find themselves trapped by payday loans are real.

A rate cap like that would obliterate payday loans. Do you wish to deny them to the poor? I can respect the argument that payday loans are just like gambling -- a way to take money away from the innumerate, and on that basis I could see eliminating them. But I would prefer an explicit statement that, in effect, the poor are too stupid to handle payday loans properly.

[Sean M. Brooks]

Hi, Hilzoy. I trust you are well.

And, I'm sure not voting for Obama! McCain is the man who should be President.

Sincerely, Sean

[justcorbly]

We are wasting our time worrying about these lenders. They're not doing much real damage. The big task is to crack down on the practices of the wealthy.

Yes, but doing the one does not preclude doing the other. Besides, are we certain that large financial institutions have no involvement in payday lending?

A rate cap like that would obliterate payday loans. Do you wish to deny them to the poor?

I've no idea what it costs a payday lender to stay in business or what kind of profit margin they have, but I need to be convinced they need an interest rate of 391 percent to make money.

Payday lenders scam the poor, they do not provide a service to the poor. (That's the industry's usual propaganda.) It has nothing to do with any alleged "stupidity." Most folks who use payday lenders have little or no experience with any financial insitution (tens of millions of Americans do not have even a simple checking acount).

[ThatLeftTurnInABQ]

These people are our neighbors. We better freaking take care of them, because we're next.

For some reason the phrase "I am my brother's keeper, I am my sister's keeper" comes to mind.

[Chris Crawford]

I've no idea what it costs a payday lender to stay in business or what kind of profit margin they have, but I need to be convinced they need an interest rate of 391 percent to make money.

The data you need is already in existence: there are lots of payday lenders. That means that there's competition between them. Which means that, if they are charging excessive rates, then a newcomer could take away their business by charging lower rates. But the rates are pretty stable, which means that they're about as low as they can go. Anything lower means that the lender won't make a justifiable profit and will just leave his money in a savings account where it earns a profit without his having to lift a finger.

[Tony P.]

Let's assume for the sake of argument that:
1) Payday loans are a needed service; and
2) Payday lending is profitable.
Question: Why should not Uncle Sam get into the payday lending business?

If you think that's a silly question, consider that even (or perhaps, especially) Republicans are content with Uncle Sam getting into the mortgage-lending and investment-banking business.

--TP

[justcorbly]

... there are lots of payday lenders... there's competition... if they are charging excessive rates, then a newcomer could take away their business by charging lower rates.

It mean nothing of the sort. You're letting that Econ 101 class blind you to how people really behave and what really motivates them.

Nor am I willing to concede that cometition is rampant among the lenders. How sure are you that each lender operates independently? It would be unusual of most weren't owned by a small number of large concerns. In any case, we have lots of evidence of seemingly competitive businesses who collude to maintain high progit margins.

Besides, the size of a payday lender's profit margin has no bearing on the legitimacy of their business. A scam is a scam. You don't get to claim legitimacy by pointing to a skinny profit margin.

[jesurgislac]

Chris: The data you need is already in existence: there are lots of payday lenders. That means that there's competition between them. Which means that, if they are charging excessive rates, then a newcomer could take away their business by charging lower rates.

Ah, the myth of the free market providing low prices.

Alternatively, payday lenders know damn well they benefit from keeping interest rates as high as possible, and so don't compete with each other to lower rates: this is even more strongly true if, as has been claimed, payday lenders are charging just what they need to stay in business.

My guess is that payday lenders operate on "what's the most we can charge and get away with" not "what's the least we can charge". It's not as if people coming to payday lenders have any choice.

[KCinDC]

Chris, the same logic can be used to demonstrate that almost any proposed business legislation will lead people to keep their money in savings accounts rather than operate such businesses. Some of us are less confident in the perfection of the market.

[Sebastian]

For the sake of comparison I see that my bank is willing to give you an advance to your checking account of up to 1 and a half weeks, up to $500 if you have a regular direct deposit from your employer. They give it only in $20 increments and charge $2 for every $20. Unless I'm horribly wrong on my math that annualizes out to 347% on what should be a much safer loan with little to no extra overhead costs (they have regular direct deposits, a long term record of them, and they have all your account information already).

[Chris Crawford]

You're letting that Econ 101 class blind you to how people really behave and what really motivates them.

OK, if you have an argument from your Econ 202 class, let's hear it.

It would be unusual of most weren't owned by a small number of large concerns.

We're both speculating here, but I would expect large concerns to take advantage of their size by adapting uniform advertising, a logo, a name -- that sort of thing. But the payday loan services that I notice -- admittedly a statistically insignificant sample -- are all different. "Joe's Payday Loans", "Cash Now!", "Quickie Loans" -- that's the kind of thing I see. Do you know of any consortia of payday lenders?

Besides, the size of a payday lender's profit margin has no bearing on the legitimacy of their business. A scam is a scam. You don't get to claim legitimacy by pointing to a skinny profit margin.

This statement is why I continue to disagree with you. You're making a value judgement that is your own personal judgement and you're treating it as Absolute Truth. There are lots of people engaged in commerce that I find objectionable. Some people sell hunting stuff -- I find that objectionable. Some people sell automatic weapons -- I find that objectionable. There are other commercial activities that other people find objectionable. Some people sell contraceptives to women -- there are people (I am not among them) who find that objectionable. There are all sorts of things that different people find objectionable. And the way we sort all this out in a democracy is to pass legislation that declares some things to be illegal (such as selling drugs) and other things to be illegal. In some states, payday loans are illegal. In some states, they are legal. That's how the system works. It doesn't work by you simply declaring the Truth. You're welcome to your opinion -- but other people have different opinions.

[Carleton Wu]

Brett,
I don't exempt myself, most of the troubles in my life have been due to things I did, which I should have known, or worse DID know, were foolish.

Im not sure what your life has been like Brett- but in my experience the difference in the results of mistakes is often middle v lower class. People get in trouble in the middle class, and they can usually claw their way out via their connections- a family member loans some money, a friend helps out, just having the middle-class skills helps them navigate the system or talk their way into a better position.

Im thinking in particular of someone I know who screwed up several times as a young adult, the sort of mistakes that would've led to disaster if they hadn't had middle-class parents to step in & clean things up. And when he finally got his act together, he became a right-winger & basically sees himself as a 'self-made man'.

Not saying that this applies to you, but that's what it made me think of. Ive been fortunate in the same way- middle-class enough to goof off as a young man & then talk my way into a middle-class job.

[Carleton Wu]

Chris,
The original post noted that there are a great many payday loan operations in the US. From that fact we can conclude that the market for payday loans is competitive; from that we can conclude that the interest rates are at the lowest level that permits a decent rate of pay for the operator. Ergo, capping interest rates will serve only to put these operators out of business and remove this source of loan from the poor.

I think that you ought to be very suspicious of this sort of reasoning when it has no empirical evidence to back it up. Actual economic behavior is messy and difficult to predict.
Case in point, empirical evidence is presented upthread that suggests that this reasoning may not be correct.
A similar case is often made against minimum-wage laws, but the empirical evidence so far does not support it. Given that, it's interesting to watch which people change their minds and which decide that the empirical evidence must be wrong.

[KCinDC]

Im thinking in particular of someone I know who screwed up several times as a young adult, the sort of mistakes that would've led to disaster if they hadn't had middle-class parents to step in & clean things up.

Imagine if he'd had ultrarich parents. He might have become president of the United States.