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> if LendUp would lend someone $200 for 30 days for a $1.50 (APR of 9%) they wouldn't be extortionate in their rates They also wouldn't be making money. Keep

by Lazare 10y ago

> if LendUp would lend someone $200 for 30 days for a $1.50 (APR of 9%) they wouldn't be extortionate in their rates They also wouldn't be making money. Keep in mind: 1) APR rolls up all interest, charges, surcharges, fees, etc. (which is fine) 2) Small short duration loans have a significant amount of paperwork (and it just increases with new "know your customer" laws, money laundering rules, anti-terrorism rules, etc.), plus all the normal overheads of business: Staff, training, rent, buildings, insurance, whatever. A fair interest rate on a loan of the type being discussed is, sure, a few percent, maybe even under 10% (although, you know, my credit card has a higher rate than that, so let's not go overboard here). But a fair fee to process a loan app is going to be fairly high; $20-30 is honestly low if you're doing the application in person at a storefront. But if you lend someone $300 for two weeks at a 5% annual interest rate and a $25 fee, the APR isn't 5%, it's well over 200%. Nonprofits which have tried to venture into the payday lending space have found themselves forced to charge eye-watering APRs, not because they're trying not to "leave money on the table", but because you cannot usefully compare an APR between a 20 year mortgage and a two week payday loan, because the cost of processing an app for a $500k mortgage and a $50 payday loan is a lot less different than the face value would suggest. I see a lot of people are talking about defaults, but it's not the defaults (which aren't even that high), it's the fees when calculated on low value, short term loans. Edit: Not saying payday lenders are amazing (or even that they should be legal) just that a naive comparison of the APR of a payday loan to an auto loan conceals more than it reveals. Payday loans are a very expensive product which some very poor people really, really need. Wishing it was cheap doesn't make it less expensive; banning it doesn't make the need go away. There's not a lot of good answers.

AnthonyMouse 10y ago
It seems like the solution might be to make the term of the loan longer. Paying $30 of interest on a $200 payday loan once shouldn't really break anybody, the problem is people are doing it every payday. What happens if you borrow $200 and pay it back at $20/month over the course of a year? Then next month you don't need another loan because you still have $180 left from the original loan, instead of having -$30 from having already paid it back with interest.
- thaumasiotes 10y ago
  Well, paying $240 for a $200 loan over twelve months as opposed to $230 for a $200 loan over three weeks certainly lowers the APR, but it also makes the loan more expensive. I don't think people really care about APR for its own sake. > Then next month you don't need another loan because you still have $180 left from the original loan, instead of having -$30 from having already paid it back with interest. As an empirical matter, a lot of the people who do badly by using payday loans will not behave in the way you're suggesting -- they will spend the money they have, and are likely to need another loan next month anyway (although getting it will be harder since they now have an outstanding loan). People who currently use payday loans responsibly won't have that problem, but they will have the problem that you just increased their borrowing costs by 33%.
  - Dylan16807 10y ago
    > likely to need another loan next month anyway (although getting it will be harder since they now have an outstanding loan). When they only have to make a small payment, they effectively already have another payday loan equivalent. Before, they had to scrounge up $230 to pay off the loan, and they could get another $200 loan back out immediately. Now, they can take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10. In other words, any money they would have gotten from 'another loan' is an illusion, because that loan was sourced directly from their own wallet, with someone else taking a cut. They don't need 'another loan'. For someone's borrowing costs to increase, they have to be in one of two scenarios: The first is taking out a payday loan once and never rolling it over. That scenario is not a big deal because the total cost is small by definition. The other scenario is someone that takes out the same value in one-year loans every month that they would have taken out in payday loans. This is not a reasonable comparison, because this person has ten times as much outstanding debt.
    - thaumasiotes 10y ago
      > When they only have to make a small payment, they effectively already have another payday loan equivalent. Before, they had to scrounge up $230 to pay off the loan, and they could get another $200 loan back out immediately. Now, they can take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10. > In other words, any money they would have gotten from 'another loan' is an illusion, because that loan was sourced directly from their own wallet, with someone else taking a cut. They don't need 'another loan'. Well, obviously exactly the same argument applies to the first loan -- it's sourced directly from their own wallet, with someone else taking a cut. But you don't see a lot of people arguing that therefore there was never a need for any lending in the first place (actually, you do; old religions have quite a bit to say about this. You don't see a lot of people making the argument today). You're ignoring the point I was making, though. Compare: http://slatestarcodex.com/2014/05/25/apologia-pro-vita-sua/ http://slatestarcodex.com/2014/05/25/apologia-pro-vita-sua/ > I do occasional work for my hospital’s Addiction Medicine service, and a lot of our conversations go the same way. > My attending tells a patient trying to quit that she must take a certain pill that will decrease her drug cravings. He says it is mostly covered by insurance, but that there will be a copay of about one hundred dollars a week. > The patient freaks out. “A hundred dollars a week? There’s no way I can get that much money!” > My attending asks the patient how much she spends on heroin. > The patient gives a number like thirty or forty dollars a day, every day. > My attending notes that this comes out to $210 to $280 dollars a week, and suggests that she quit heroin, take the anti-addiction pill, and make a “profit” of $110. > At this point the patient always shoots my attending an incredibly dirty look. Like he’s cheating somehow. Just because she has $210 a week to spend on heroin doesn’t mean that after getting rid of that she’d have $210 to spend on medication. Sure, these fancy doctors think they’re so smart, what with their "mathematics" and their "subtracting numbers from other numbers", but they’re not going to fool her. If we divide payday lendees into two classes, the ones who get stuck in a cycle of rolling over their loans are behaving like the heroin users. They won't be helped by the higher-cost lower-APR loan because they will not "take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10", and don't understand that process. They will take $20 from their paycheck, pay off $20, spend the rest of their paycheck on analogical heroin, and wind up with $0, which is less than $10. The ones who don't get stuck in a cycle of rolling over their loans won't do that, but they weren't doing it anyway. You haven't benefited them; you've made their operating costs significantly higher. No one benefited from your change to the system.
aianus 10y ago
What does a payday loan officer in a branch do that costs $30 that an algorithm can't do? Particularly for a repeat customer? If your analysis is correct they could do away with the branches and charge far less... Maybe make it app, even poor people have smartphones.
oarsinsync 10y ago
> A fair interest rate on a loan of the type being discussed is, sure, a few percent, maybe even under 10% (although, you know, my credit card has a higher rate than that, so let's not go overboard here). Credit card rates are effectively 0% if you pay off your statement balance in full, whereas these rates you always have to pay.

by Lazare 10y ago

AnthonyMouse 10y ago

It seems like the solution might be to make the term of the loan longer. Paying $30 of interest on a $200 payday loan once shouldn't really break anybody, the problem is people are doing it every payday. What happens if you borrow $200 and pay it back at $20/month over the course of a year? Then next month you don't need another loan because you still have $180 left from the original loan, instead of having -$30 from having already paid it back with interest.

thaumasiotes 10y ago
Well, paying $240 for a $200 loan over twelve months as opposed to $230 for a $200 loan over three weeks certainly lowers the APR, but it also makes the loan more expensive. I don't think people really care about APR for its own sake. > Then next month you don't need another loan because you still have $180 left from the original loan, instead of having -$30 from having already paid it back with interest. As an empirical matter, a lot of the people who do badly by using payday loans will not behave in the way you're suggesting -- they will spend the money they have, and are likely to need another loan next month anyway (although getting it will be harder since they now have an outstanding loan). People who currently use payday loans responsibly won't have that problem, but they will have the problem that you just increased their borrowing costs by 33%.
- Dylan16807 10y ago
  > likely to need another loan next month anyway (although getting it will be harder since they now have an outstanding loan). When they only have to make a small payment, they effectively already have another payday loan equivalent. Before, they had to scrounge up $230 to pay off the loan, and they could get another $200 loan back out immediately. Now, they can take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10. In other words, any money they would have gotten from 'another loan' is an illusion, because that loan was sourced directly from their own wallet, with someone else taking a cut. They don't need 'another loan'. For someone's borrowing costs to increase, they have to be in one of two scenarios: The first is taking out a payday loan once and never rolling it over. That scenario is not a big deal because the total cost is small by definition. The other scenario is someone that takes out the same value in one-year loans every month that they would have taken out in payday loans. This is not a reasonable comparison, because this person has ten times as much outstanding debt.
  - thaumasiotes 10y ago
    > When they only have to make a small payment, they effectively already have another payday loan equivalent. Before, they had to scrounge up $230 to pay off the loan, and they could get another $200 loan back out immediately. Now, they can take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10. > In other words, any money they would have gotten from 'another loan' is an illusion, because that loan was sourced directly from their own wallet, with someone else taking a cut. They don't need 'another loan'. Well, obviously exactly the same argument applies to the first loan -- it's sourced directly from their own wallet, with someone else taking a cut. But you don't see a lot of people arguing that therefore there was never a need for any lending in the first place (actually, you do; old religions have quite a bit to say about this. You don't see a lot of people making the argument today). You're ignoring the point I was making, though. Compare: http://slatestarcodex.com/2014/05/25/apologia-pro-vita-sua/ http://slatestarcodex.com/2014/05/25/apologia-pro-vita-sua/ > I do occasional work for my hospital’s Addiction Medicine service, and a lot of our conversations go the same way. > My attending tells a patient trying to quit that she must take a certain pill that will decrease her drug cravings. He says it is mostly covered by insurance, but that there will be a copay of about one hundred dollars a week. > The patient freaks out. “A hundred dollars a week? There’s no way I can get that much money!” > My attending asks the patient how much she spends on heroin. > The patient gives a number like thirty or forty dollars a day, every day. > My attending notes that this comes out to $210 to $280 dollars a week, and suggests that she quit heroin, take the anti-addiction pill, and make a “profit” of $110. > At this point the patient always shoots my attending an incredibly dirty look. Like he’s cheating somehow. Just because she has $210 a week to spend on heroin doesn’t mean that after getting rid of that she’d have $210 to spend on medication. Sure, these fancy doctors think they’re so smart, what with their "mathematics" and their "subtracting numbers from other numbers", but they’re not going to fool her. If we divide payday lendees into two classes, the ones who get stuck in a cycle of rolling over their loans are behaving like the heroin users. They won't be helped by the higher-cost lower-APR loan because they will not "take $230 from their paycheck, move $200 from one pocket to another, pay off $20, and have a bonus $10", and don't understand that process. They will take $20 from their paycheck, pay off $20, spend the rest of their paycheck on analogical heroin, and wind up with $0, which is less than $10. The ones who don't get stuck in a cycle of rolling over their loans won't do that, but they weren't doing it anyway. You haven't benefited them; you've made their operating costs significantly higher. No one benefited from your change to the system.

aianus 10y ago

What does a payday loan officer in a branch do that costs $30 that an algorithm can't do? Particularly for a repeat customer? If your analysis is correct they could do away with the branches and charge far less... Maybe make it app, even poor people have smartphones.

oarsinsync 10y ago

> A fair interest rate on a loan of the type being discussed is, sure, a few percent, maybe even under 10% (although, you know, my credit card has a higher rate than that, so let's not go overboard here). Credit card rates are effectively 0% if you pay off your statement balance in full, whereas these rates you always have to pay.