It is true that these companies extort money from the needy and get them trapped in a cycle of debt. The problem is that they also serve a need. Many people live paycheck-to-paycheck, just barely getting by, and any sudden emergency (car repair, medical bill, broken furnace) can throw their delicately balanced finances out of whack and they often feel they have nowhere else to turn to at short notice.
What surprises me is that the so-called free market has not provided a solution to this problem. Why hasn’t someone started a business that provides payday loans to meet this need and makes a modest profit by charging reasonable rates of interest and not enticing people to get deeper and deeper into debt? Surely it could drive the ruthless profiteers out of business? Or is such a business model not viable?
John Oliver’s show Last Week Tonight continues his series of investigative reports and takes on the phenomenon of payday loans.
It did.
It was called a community bank, and it relied on personal integrity to determine your creditworthiness. Trouble was, making small signature loans took as much effort as making a car loan or a mortgage, plus the advent of credit rating agencies forced banks to stop using the judgement of a local loan officer. Combine that with massive consolidation in the financial company universe, and you now have only 4 or 5 corporations that control the vast majority of the consumer credit business. They aren’t much interested in loans of less than $10,000 and they use a cookie-cutter approach to their loan approval process so low-income people are squeezed out.
What surprises me is that the so-called free market has not provided a solution to this problem.
I have wondered the same thing.
Also, why are interest rates on credit cards generally still quite high, even for people with good credit, when other interest rates are so low.
Free market competition isn’t really serving consumers well lately.
I’m my point of view the problem is not how to find a way for people to get cheaper loans but rather to get people out of misery.
The one’s that get caught by these schemes are normally the poorest and the most disenfranchised in society. The main goal of these companies is not to solve a problem but to prey on the disgrace others by perpetuating the cycle.
This is the inherent problem of today’s economy, as long as we keep playing the game they keep winning because they make the rules. Let’s not play the game any more.
Take a reasonable APR; say, 12%. You offer a loan of $200 for half a month, so the APR works out to 0.5%. You get back $10 when the loan is repaid.
You would have to make a vast number of loans to cover the salary of just one employee. Not counting the other employees you need. And the bonds protecting you from liability. And business insurance against theft. And the contract with the armored car service. And the rent. And the utilities. And the banking fees.
With all of the necessary expenses to run this type of business, you simply cannot offer a reasonable rate. Many states do have laws regulating payday loan places, including how much debt a company (not just a location) is allowed to loan out to a given person and how much interest they are allowed to charge. Many states, unfortunately, do not have such laws.
Good morning Mano,
I think there are deeper, economic and societal issues at play here.
We now live in communities where walking, or taking public transportation, to work are seldom a viable option. That is certainly true in Cleveland. I recall a conversation several years ago at the Phoenix on Lee road about a company that moved from the east side of Cleveland to Solon. Workers who previously walked or rode a bus to work were told that their jobs were now a thirty- to forty minute drive away. Those who didn’t own cars lost their jobs. Those who did own cars lived at the mercy of gas prices and mechanical failures or vehicle accidents.
Living from paycheck to paycheck doesn’t allow for catastrophe and increasingly over the past two decades I have encountered variations on the phrase existing one disaster away from living on the street.
Previous generations relied on unofficial community banks where churches, fraternal organizations or ethnic associations pooled funds to offer low-cost or no-cost (as in the Hebrew Free Loan Association>) loans to take care of their own.
Pay day loans are not the problem, they’re simply an obvious symptom.
Do all you can to make today a better day,
Jeff
This is actually a free market solution….you screw those you can. Sam reason milk is more expensive in poorer areas.
They’re deliberate scams. The free market has never dealt with scam artists well. There’s no way to tell the difference between a legitimate sale and a scam. It’s like asking the free market to deal with a pyramid scheme.
Payday loans, title loans, rent-to-own are all scams that take advantage of known flaws in the human mind that center around short term rewards versus long term consequences. Basic immaturity, desperation and psychological changes associated with long term poverty make people even more susceptible to this sort of offer.
I’ve had apprentices using rent-to-own shops that couldn’t get past the low-weekly-payment con. I sat one down and we did the math on his rent-to-own TV showing him that if he simply saved the payment he could own three sets in the time he would own the rented one. The counter was that he could have the big screen TV now.
A lot of this is simply the systematic draining of money form the lower end of society. Back in the early 70s there were usually people around you who had money. A relative or friend might lend you enough to get by. Charities, churches, and your boss would often step up and get you through a rough spot. Now the money is gone. You can have entire communities where everyone is living hand-to-mouth. Entire populations living on the edge. One injury, car repair, unexpected bill away from homelessness. And the wolves patrol the edges of the cliff to exploit the weakened, wounded, desperate and those who have fallen.
It also represents a loss of faith in the system. In a society that allows exploitation at every turn, that fails to protect and support its population it is no wonder that planning gets foreshortened. Learned helplessness is quite real.
Because the wealthy have been able to avoid taxes and the middle class are systematically encouraged to flee the cities leaving the crumbling infrastructure and people too poor to move behind, there are always state and local funds for new developments but no funding for existing ones, the cities are finding themselves strapped for cash. This is the biggest reason why law enforcement has become a major source of income for municipalities. If you can’t demand cash from people with money you have to get it from the people who don’t.
Urban neighborhoods in cash poor cities are prime feedstock for payday loans and the rest of the financial wolves. people desperate to pay off am municipal fine to avoid additional fees are desperate for an easy solution offered by a reassuring media figure like Mister Williams.
The market isn’t free. The buyers are desperate enough to need an immediate solution and take whatever they can get without even being in a position to shop around. They’ll go to the nearest place and offer their granny/soul/firstborn as security if asked to do so. The reason they get into that situation is that the labour market isn’t free either. As sellers of labour, they’re often forced to take the price they can get, from the first job that comes their way. There is no incentive to offer them a good deal when they’re acting under such pressures.