“Basically, payday loans are the Lay’s potato chips of finance. You can’t have just one and they’re terrible for you.”
“If someone makes you a loan that’s illegal, either because they don’t have a license or they violate usury laws, you’re not under any obligation to pay it back,” said Norman Googel, an assistant attorney general in West Virginia.
Payday lending traditionally happens in seedy storefronts, often in low-income neighborhoods and around military bases. Not any more! Eager to get in on the next big subprime lending bubble before it bursts, big banks are brushing up on their loan shark chops and opening payday lending divisions.
So what’s the problem, here? Well, payday loans from banks typically carry annual interest rates as high as 365%. That means if you took out a $10 loan, it would cost $46.50 to pay it back. It doesn’t feel so bad because payday loans are supposed to be short-terms loans, but the typical payday loan customer uses payday loans often enough that he or she is actually paying that kind of interest.
Banks are especially interested because they tend to hold the payday loan customer’s deposits, as well. Payday loan customers wind up paying more in overdraft fees, and are more likely to lose their bank accounts. In short, it’s bad news for consumers.
The Center for Responsible Lending is watching this trend, and has more information about big bank payday lending.
The same banks that used to make—or finance—the subprime loans that sent the world economy into a nosedive are now making and financing payday loans. Now they just use TARP funds and cheap loans from the Fed.
Payday loans are still subprime loans, but the risk is built into the enormous interest rates, which average 455%. The mafia offers better interest rates. Actually, the mafia is probably just operating payday loan storefronts now. Wells Fargo in particular is knee-deep in payday loans. It directly finances a third of payday loan branches in the U.S.
In order to make those 455% loans, banks like Wells Fargo and US Bank are able to borrow money from the Federal Reserve at .5% or less. (Wait, does that mean they can really average a 454.5% profit, not counting defaults? Holy shit.)
(Video from Showdown in America.)
The still-new Consumer Financial Protection Bureau is doing a lot of listening, trying to figure out where to focus its energy. Here are the main areas of concern according to Gail Hillebrand (formerly of Consumer Reports, now the CFPB’s Associate Director of Consumer Education and Engagement):
- Debt settlement issues. Consumers who pay for debt settlement services are too often not getting the help they were promised.
- Foreclosures, credit scores, credit reports, and their effect on employment. Advocates in Ohio are worried about the impact foreclosure can have on a homeowner’s credit report and credit score, and how the credit report, in turn, can affect future employment prospects.
- Disputing a credit report error. A Montana attorney reported that his clients frequently have difficulty figuring out how to dispute a credit report error, and they often end up purchasing unnecessary and costly credit monitoring or credit repair services when searching for information online.
- Payday lending. Payday lending operations—including those that operate online and those that target people residing on reservations—continue to be a concern for both communities. One Montana speaker described a client with $1,500 in payday loans whose sole income was $1,600 a month in disability payments.
Intellectual property is the new legal battlefield, as one industry after another lawyers up to try to make money from its IP, instead of making money from, say, a product people want to buy.
Righthaven, for example, has been running around suing bloggers and website owners who use quotations of copyrighted works. This is fair use, but Righthaven doesn’t care. Which is why it just got slapped with an order to pay $34,045.50 in attorney fees. Trying to weasel out of the inevitable, Righthaven tried to argue that it shouldn’t have to pay attorney fees because its claims were frivolous in the first place. Right. Props to the Randazza Legal Group and J. Malcolm DeVoy for a well-deserved check.
Porn producer Mick Haig Productions has another approach. Keep reading
Members of the armed forces bear some heavy burdens, but those burdens don’t always take the form of terrorists and enemy combatants. In recent years, soldiers and veterans have faced plenty of adversity on the home front, too, from healthcare issues to combat pay questions.
They also face an assault from predatory lenders, which clog towns with military bases almost to the exclusion of “regular” stores that have price tags instead of installment plans.
Compared to a payday loan, Billfloat is a steal. Instead of paying, say, 360% interest, Billfloat may be only 150% (see Billfloat’s chart, at right).
For all the flack the credit card industry (rightly) gets, the highest interest rate you are likely to see from more credit cards is 30%. That’s a bargain compared to the payday lending industry. If you have to float a bill, use a credit card, not Billfloat.
A commenter alerted me to the fact that the article linked below has been changed, apparently because the story was fake.
On a radio interview this week, Dolly Parton took Senator Bob Corker (R-Tenn.) to task over his opposition to a bill that would lower the interest rate payday lenders may charge from 400% to 36%:
For a dad and a mom trying to raise some kids on a military paycheck, a 400 percent interest rate is not just dumb, it’s un-American.
Dolly Parton gets it.
Dolly Parton Takes On a U.S. Senator | The Boot (thanks, Donna!)
Payday loans are small, short-term, high-interest loans. Most are less than $400, with a term of two weeks or less. In exchange, the consumer generally pays $15 for every $100 borrowed, or a 360% APR. (Even high-interest credit cards generally charge less than 30% APR.)
Most consumers roll over the loan several times, incurring an additional fee each time. For example, a $300 payday loan rolled over for three months will cost an additional $270 in interest payments.
So why do people use payday loans?
Possibly because there are few alternative for payday loan customers, if any. This is true, although some credit unions have found ways to lend to the same clientele at more reasonable rates. Still, as long as payday loans remain legal and the market fails to provide a widely-available, viable alternative, it looks like consumers will continue to use them.
(photo: slideshow bob)