I knew payday loans were bad but wow!!!

[cooliemae]

JOhn Oliver & Sub-prime Auto Loans

[frugal saver]

I think these loans fit the definition of predatory lending perfectly. They prey on poor, uneducated customers and use misleading and deceptive marketing to get them to sign for loans with insane terms that the borrowers can't really afford.

I used to receive copies of the contract as part of the complaints that people submitted. The contract form was like the long form you get from the car dealership when you buy a car.

About a third of the way down the page there would be something like:

Finance Rate: 480%
Amount Financed: $5,000
Amount Due: $14,000


It would literally jump out at you. The only way people didn't "know" is if they kept their eyes shut when they signed the contract.

[disneysteve]

I used to receive copies of the contract as part of the complaints that people submitted. The contract form was like the long form you get from the car dealership when you buy a car.

About a third of the way down the page there would be something like:

Finance Rate: 480%
Amount Financed: $5,000
Amount Due: $14,000


It would literally jump out at you. The only way people didn't "know" is if they kept their eyes shut when they signed the contract.

The problem with a lot of these loans is that they are promoted as short-term and the focus is more on the fee than the %. If you are taking a payday loan for 2 weeks, you just look at "how much is this going to cost me?" not "what would it cost me if I didn't pay back this loan for a year rather than 2 weeks?". So the 300+% interest rate might mean you'll pay $60 for that $500 loan. But that only works if you actually pay it back on time. If 2 weeks from now, you're short again, as often happens, that's when the real trouble starts. I suspect that the payday lenders don't sit down and explain all of that. I imagine they say, "No problem. We'll lend you $500 and in 2 weeks you only need to pay us back $560."

[dczech09]

I was once doing an audit for a company. I was talking to the owner and asked "so this store you have in Appleton is a payday lending shop, right?" The owner got offended and said "we are an alternative financing company..." Whoops!

On one hand, these lenders are really just being strategic about their marketing (using dollars instead of interest rates). However, what their are not excused for is not clearly explaining the terms and conditions to borrowers. They should be consulting with them more, and not just leave everything up to fine print. Granted, if they were more consultative they may lose business because people would be more informed.

We cannot legislate this away, however we can work to educate this away.

At the end of the day, yes these types of lenders are predatory. Not necessarily because of the exorbitant interest rates, but because of the asymmetrical information.

[disneysteve]

I was once doing an audit for a company. I was talking to the owner and asked "so this store you have in Appleton is a payday lending shop, right?" The owner got offended and said "we are an alternative financing company..." Whoops!

Reminiscent of the classic Honeymooners episode when Ed Norton said he was a "subterranean engineer". He was a sewer worker.

[disneysteve]

We cannot legislate this away

Sure we can.

Put a cap on interest rates. Credit cards go up to 30%. No need to allow anything higher than that. That's insane enough.

Change the documentation requirements. Just as credit card statements are now required to show how long it would take to repay your balance if you only pay the minimum, do something similar for these loans. Clearly spell out the actual costs involved and total that will need to be repaid. And put it front and center on the first page, not buried somewhere.

[GoodSteward]

Exactly. It is all predatory lending, and it's perfectly legal. Immoral, but legal.

Considering it only takes 10-14 days to get your refund if you file electronically so I never really saw the point of paying a couple hundred percent interest to get it a few days earlier.

My brother does this. They get back some ridiculous 4-5k$ on taxes (pays in nothing during the year but has 4 kids), and thinks nothing of forfeiting 200$ to get it a week or two sooner. I can't believe it. I have figured it was because he didn't earn it, so it doesn't hurt. It isn't "his" money since it's all tax credits (government handout).

I also have wondered if it is due to the lack of understanding the value of money. I mean this is the same person who has 4 credit cards on his credit that went to collections, and the HIGHEST was just 800$ That was after late fees and missed payments. The smallest was 300$. How do you not pay 15$ just to keep the card up and credit in check? His credit is awful so he gets subprime everything.

Put a cap on interest rates. Credit cards go up to 30%. No need to allow anything higher than that. That's insane enough.

Change the documentation requirements. Just as credit card statements are now required to show how long it would take to repay your balance if you only pay the minimum, do something similar for these loans. Clearly spell out the actual costs involved and total that will need to be repaid. And put it front and center on the first page, not buried somewhere.

I agree completely. If the loan is so risky you feel justified charging that kind of interest and fees then it is too risky for the people it's meant for who have a bad history and can't get anything else. Most people live check to check. Getting even part of the check early is putting them in a position they can't come out of. That's why so many have to keep rolling it.

I talked to someone who works at one of these places. A lady had been paying on a loan for 10 years. She had paid in 30,000$ on an 8,000$ loan, and still owed 10,000$. That's right. She still owed MORE than she borrowed after paying that much. The girl said to stay away from those places at all costs.

[disneysteve]

The Freakonomics podcast did an episode on this topic on April 6. It's well worth listening to. They make a pretty reasonable case for why payday lending isn't as evil as it gets made out to be.