In today’s financial climate it is nice to have options to get cash when you need it. Many people have friends or relatives who they can turn to when they get behind on bills, but others may not be so fortunate. The latter groups of people are those who find that payday loans are a viable option, an option that gives them the ability to access cash quickly and at a reasonable rate as compared to the alternatives of destroyed credit and outrageous bank fees.
I have been in the payday loan business for about five years, prior to that I had a good Federal job and was just two years away from being fully vested in my Federal retirement. My job was privatized and overnight, my Federal retirement was out the window. I had two options: to continue to work for the contractor 800 miles away for the same pay and no retirement benefits or to do something different. I started to look for something different. Luckily during my Federal career I had been steadily investing in small real estate projects and had some resources to work with. I looked at a large number of real estate based businesses but one day I came across an opportunity to buy into a payday loan corporation. At first I didn’t really understand the industry and couldn’t really understand why people used this type of business. My “ah-ha” moment came on the day when I got a call from my son who was in college at the time. He said he needed money because he had been overdrawn at the bank and didn’t know it. He had been using his debit card for a variety of small purchases like gas, slurpees, fast food, etc. The bank continued to allow his debit card to charge these items while charging $25.00 for each and every transaction for which he was “over drawn” resulting in “over draft fees”. By the time he figured out what was going on, he was $275.00 in debt to the bank for fees on his 11 transactions. From this point on, I started to realize the fallout for a lot of Americans who fall behind on their bills and don’t have credit options available to them.
Here are some of the things that I have since learned about the payday loan industry. Payday loan stores started to spring up in the 1990s due to a number of factors taking place in the financial industry. Traditional banks were exiting small dollar, short term lending due to the high cost structure and high risk nature of this type of lending. In addition they saw the path of least resistance to higher profits as higher fees, higher NSF (non-sufficient funds check) fees and over draft protection fees. In short, the banks saw an opportunity in Americans’ lack of access to short term credit. These factors combined created a demand for a source of short term credit. Good old American capitalism provided a solution, payday loans.
Detractors of the industry like to use APR (annual percentage rate) to describe why payday loans are expensive. An APR is the cost of borrowing money as if it were based on a 1 year loan. Payday loans are not one year loans; they are usually anywhere between 10 day and 30 day loans or up until your next payday. In the same way you would pay $35 for a 5 minute cab ride across town, you wouldn’t pay $7 per minute to rent or own a car. If you did your one day rental rate would be $10,008. For the sake of this argument, let’s play by the payday industry critics rules and use APRs.
So let’s compare costs of payday loans as compared to the alternative. We will look at 3 examples: a payday loan, a bounced check, and my son’s overdraft fee.
How a payday loan compares: $100 payday loan with a $15 fee for two weeks = 391% APR $100 bounce check with a $35 NSF and $20 merchant fee for 1 day = 20,231% APR $1.59 slurpee at C store with a $25.00 overdraft fee for 1 day = 583,770% APR
Now multiply the money the bank profited on their “overdraft protection” from my son on this transaction and multiply that by the 11 overdraft fees over the 7 days he used the card before he knew he was overdrawn. These are the simple truths about the industry that are often times glossed over by the industry critics.