I just saw a TV commercial for Speedy Cash. They have loans available for only – _ only! _ – 8% per month.
At least they were upfront in the ad: they did say that the APR is only – _ only! _ – 96%.
Such a deal!
The website illustrated a loan of $2,600 repaid via 42 instalments. APR was 132%!!!
Eh, no wonder Obama was so keen to crack down on these businesses.
Looks like they operate in Canada and the UK as well.
Speedy Cash, Found Wherever Poor People Live!
I have no problem with these places existing.
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They have to charge exorbitant prices (in this case, interest) to cover all of the people who don’t repay.
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The alternative to paying 96% interest would be to go to a loan shark. And I imagine the loan shark interest is even higher. And their collection methods are more interesting.
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If you don’t like the terms, then don’t agree to them.
Ok, it’s a valid point that people might need some short term cash under some circumstances. Maybe the 8% interest (probably less if you pay earlier) might not be too large if you are in a state of emergency.
The problem is when people are so financially illiterate and their IQ is so low that they cannot make good decisions. So, the question is, to what extent should the government protect people from their own stupidity?
Perfect example of the poor gets screwed even more than everybody else…
This is a well established market in UK. These payday lenders make a fortune!! Imagine at >150% APR, more than half your loans can go pop and your still making money across the whole book. I’ve seen some lenders charge 8% for a week!!.. Over 1000% APR…
I have no issue from a contractual point of view but in practice it is a predatory business targeting people who are already in dire straits.
^First, let’s all agree that a bank won’t loan them any money.
That being said, is it better for them to have A.) Speedy Cash, B.) a loan shark from the street, or C.) no credit at all?
In most cases probably C.
one of my councilman millionaire buddies owns multiple car dealerships told me that he doesnt really sell the car at much of a profit. he makes most of his money by charging high APRs on people with no credit.
Predatory lending might target vulnerable people, but vulnerable people also are in a bad position where they need special services. So, if you are a rational, intelligent person who somehow needs $5k today for an emergency and you have no other alternatives, then someone should be allowed to service you at a market rate. If you make the decision to pursue these services, then that decision is optimal for you, and government restrictions on these services will only worsen your situation.
However, many people in this sort of situation usually are not rational, intelligent or well informed. They are in constant financial distress due to poor planning, lack of knowledge, and inability to make good decisions. So, we need to decide if the government needs to tell these people how to behave through regulations, because the people are self destructive if left to their own devices.
What is lost in all this is the high rate of default rate on the loans.
Would you want to lend your money to people that are seeking these type of loans for anything less than Speedy Cash is charging with essentially no collateral? If so, maybe you can start up a business for yourself.
I feel like the free market system (such as it is here in the US) has worked this out. If there was an opportunity to lend to higher risk people at lower rates, why hasn’t someone done it? Come in a take over the market by undercutting the average payday loan shop. You could still charge high interest rates, just advertise that they’re lower than Speedy Cash and the like.
Since it hasn’t been done, I’m assume it’s not profitable.
Are you suggesting that the government telling them how to live is somehow morally or financially preferable to individual freedom of choice?
You have a much higher opinion of the government than I have.
I’m fairly well versed in banking and I agree with Greenman, but I do not agree the market without government intervention would be optimal.
Point one is not all loans are meant to be recurring, which makes APR calculations sometimes seem very high.
The second point is that the government already closely regulates how the terms and cost of the loan must be disclosed to the customer. I’m not certain there is much more the government can do without being too intrusive. For example, in mortgages they’ve made it where basically the lender can be at fault if the borrower agrees but then screws up. This has never made sense to me.
But the market does not encourage disclosure. I think the government mandating disclosure that’s easy to understand on terms and cost is very important for a functioning loan market. I believe government should be involved in ensuring decisions are made with all the information disclosed easily. But we should allow any form of lending that is profitable under those disclosures to exist.
The government as an organization is probably not as intelligent as the median person - or at least it’s inefficiencies produce a result that is worse than what the median person could have produced. However, the bottom barrel of people are probably so prone to bad decisions that the government can protect them from their own ineptitude. You must admit that there are at least some people in the US who are so bad at decision making that it would be in their interests to surrender some or all of their decision making discretion to another party.
rawraw - yes, a regulated system would be a bit less efficient overall. However, the objective of such regulation would be to protect a small number of people from extreme loss, which is assumed to be weighted heavier than a small cost to others. I expect some people here to argue on the merits of this principle. Regarding disclosures - they will protect these bottom level consumers a little bit, but not fully. I mean, you can print a picture of cancerous mouths on cigarette packages, and people still buy them.