4 ms·

An underappreciated facet of payday loans is that without them desperate people would borrow from unsavoury people - making them illegal drives the high risk lo

An underappreciated facet of payday loans is that without them desperate people would borrow from unsavoury people - making them illegal drives the high risk loan business underground into the hands of the Mafia. And then the consequences for the desperate people for defaulting is no longer bankruptcy, but broken legs or worse. I agree we should have less of it, but all legislation should be mindful of the consequences of certain types of restrictions.

CaptainZapp 8y ago
Why not cap the maximumum interest rates? Switzerland, not really a communist hell hole and quite liberal in economic matters, for example, caps annual interest rates at 15% annually. You don't see more broken legs than anywhere else.
- verbify 8y ago
  If you cap maximum interest rates then people who are deemed too 'high risk' will be refused credit. As a result, they will seek credit elsewhere. Switzerland is a wealthy low-crime country to start with, the mafia do not have a strong hold. For example the homicide rate in Switzerland is 0.54 per 100,000 people, by comparison in the United States it is 5.35 per 100,000 people.
  - ardy42 8y ago
    >>> An underappreciated facet of payday loans is that without them desperate people would borrow from unsavoury people - making them illegal drives the high risk loan business underground into the hands of the Mafia. And then the consequences for the desperate people for defaulting is no longer bankruptcy, but broken legs or worse. > If you cap maximum interest rates then people who are deemed too 'high risk' will be refused credit. As a result, they will seek credit elsewhere. You could solve the loan shark problem and cap the interest rate by socializing the rest of the risk through some mechanism -- say a regulation that requires TBTF banks to offer payday loans and make up for the loss through their other products. Obviously there are details to be worked out, but the burden of a policy to combat loan sharking does not have to fall on the most vulnerable.
    - gruez 8y ago
      >say a regulation that requires TBTF banks to offer payday loans and make up for the loss through their other products but if banks are forced to make loans at a loss, aren't we effectively subsidizing people that don't repay loans? you might think this is a noble goal, but I'd doubt many people will be on board.
      - ardy42 8y ago
        > but if banks are forced to make loans at a loss, aren't we effectively subsidizing people that don't repay loans? you might think this is a noble goal, but I'd doubt many people will be on board. Perhaps, but I have little sympathy for the feelings of the better-off people who want to clutch every penny to the point that they are jealous of the help the needy might get. If they're able to block reforms, then I think efforts need to be made to change their attitudes.
  - evandijk70 8y ago
    Most people will default before they will go to the mafia, which I think is a better solution than a payday loan
    - verbify 8y ago
      I'm struggling to follow your argument. You can also default on a payday loan - I think defaulting is better than the mafia, which is precisely the benefit of payday loans - they add in a step where you don't go to the mafia.
- beaconstudios 8y ago
  you'd presumably want to keep interest at around the level required to cover the defaulting rate, plus costs of operation. Any lower and you're essentially providing handouts - there's an argument to be had for that too (e.g. UBI, negative income tax) but it's a separate topic.
  - CaptainZapp 8y ago
    you'd presumably want to keep interest at around the level required to cover the defaulting rate, plus costs of operation Add: Plus a profit to that But that seems to be covered. There are multiple banks who will provide credit to consumers at lower interest rates than that and obviously still can make a profit. Car loans are usually lower than that. Mortgages go for between 1 1/4 and 2% (last time I looked). The maximum rate of 15% is usually applicable for credit card debts.
    - CompelTechnic 8y ago
      It's interesting that the mortgages in Switzerland can go that low. I remember that in the eurozone banks are earning negative interest on their reserves due to european central bank policy. I doubt that you would see 1.25% mortgage rates if this were not the case- it very well may be that these rates are not profitable, but are at least less unprofitable than letting the money sit in reserve.
    - tyfon 8y ago
      (I work in a bank with unsecured loans). There is a saying, you can accept any customers you want as long as the price (interest rate) is correct. As a group you can manage this pretty well. For some segments of unsecured loans the default rates are high enough to warrant those interest rates. The customers who score better gets lower rates as there is competition in the market and they often shop around. Having too high rates gives a lot of not taken up loan offers which the managers hate. Car loans are almost impossible to lose money on especially the secured ones. It becomes a question of "how much can a person damage a car before it being repossessed". Usually the car is fine and one gets the money back as long as you don't loan out more than you expect can be recovered after said damage. That's why you can give so low interest rates. Unsecured car loans are much more expensive and often requires full coverage insurance. So yes, one can give out loans to lower interest rates than 15% but then you have to cut off the lower scoring customers that would not be profitable with that rate.
- cascom 8y ago
  The problem is that pay day loans are typically pretty small <$500 and meant to be short duration 1-8 weeks, meaning that if it’s a $500 loan out for one month @15% that is $6.2 in interest, it is going to cost more than that to process and administer the loan, let alone funding costs, default risk, etc.
  - CaptainZapp 8y ago
    Which may explain why the businessmodel just doesn't exist in Switzerland.
- hopler 8y ago
  Switzerland has generous socialist programs, a strict immigration policy, and a little Nazi gold. Not highly relocatable.
glogla 8y ago
"Payday loans - we're slightly better than mafia!" You might want to rethink that slogan.
- verbify 8y ago
  On the contrary, I think you summed up my feelings pretty succinctly. Was there something I wrote that led you to think I felt otherwise?
  - natpalmer1776 8y ago
    I think the issue here is that in an ideal world, neither would exist. The original reply to your comment suggests that this is not even being considered and thus is satirizing your rationale.
    - verbify 8y ago
      I think that's a charitable reading of the parent comment. I thought I made it clear that in an ideal world payday loans (and the mafia) wouldn't exist, so I'm not even sure what kind of ideal world the parent comment is suggesting.
pjc50 8y ago
The demand is not really "pre-existing", it's one created by the payday loan industry to a large extent. Especially by advertising their use for buying consumer goods. What tends to happen is not that people go to the Mafia (traditionally they come to you!), but that people make creditors of their utility companies and landlords by deferring payment. (The older alternative to unsecured very high interest short term loans is those secured on valuables - the pawn shop).
- verbify 8y ago
  I'm not sure about the laws in your locality (in the UK you have to have a licence from the UK Office of Fair Trading to offer consumer credit), but I would generally support banning anyone other than payday loan companies from selling very high interest loans - high interest loans from utility companies and landlords strikes me as an obscenity. > What tends to happen is not that people go to the Mafia (traditionally they come to you!) The mob definitely loans money at high-interest: http://archive.boston.com/news/world/europe/articles/2009/03/15/mafia_loan_sharks_making_a_killing/ http://archive.boston.com/news/world/europe/articles/2009/03... https://en.wikipedia.org/wiki/Loan_shark#Post-criminalization https://en.wikipedia.org/wiki/Loan_shark#Post-criminalizatio...
  - pjc50 8y ago
    (also in the UK) > high interest loans from utility companies and landlords strikes me as an obscenity. My point is usually that this is a lot cheaper, since these don't usually charge interest at the payday rates. Utility companies have barriers to cutting you off. But ultimately people who have negative cashflow week-to-week are going to get in trouble. Limiting how much debt they can get in causes them to hit the buffers earlier, but less hard. (Incidentally, this is yet another major problem with "universal credit": paying it on a 6 week delay is designed to force people to use payday lenders!)
- vinceguidry 8y ago
  No, the demand is created by the people who are desperate. Let's not put the cart before the horse here. They're not going to go away even if the services do.
daddylonglegs 8y ago
I was told that the mafia in the US lost a lot of business with the rise of credit cards but I can't find a source for that. Some researchers say that people turn to payday loans not only because they don't have access to bank loans but because the charging structure for payday loans is transparent and up-front: "But most of the RiteCheck customers I interviewed had done the math and found that it was less expensive to use RiteCheck than to use a bank. In their experience, required minimum balances and fees for everything from ATM usage to account maintenance were going up." https://www.philadelphiafed.org/community-development/publications/cascade/84/04_why-do-the-unbanked-use-alternative-financial-services https://www.philadelphiafed.org/community-development/public... PS I'm not sure I'd call the payday lenders savoury myself, though they be less unsavoury than loan sharks.
coryfklein 8y ago
In the case of payday loans I don't think we have to worry about throwing the baby out with the bathwater. The number of people that will literally start turning to the Mafia for loans has got to be minuscule. On the other hand, the number of people who will no longer be bent over a barrel every day will be significantly improved.

CaptainZapp 8y ago

Why not cap the maximumum interest rates? Switzerland, not really a communist hell hole and quite liberal in economic matters, for example, caps annual interest rates at 15% annually. You don't see more broken legs than anywhere else.

verbify 8y ago
If you cap maximum interest rates then people who are deemed too 'high risk' will be refused credit. As a result, they will seek credit elsewhere. Switzerland is a wealthy low-crime country to start with, the mafia do not have a strong hold. For example the homicide rate in Switzerland is 0.54 per 100,000 people, by comparison in the United States it is 5.35 per 100,000 people.
- ardy42 8y ago
  >>> An underappreciated facet of payday loans is that without them desperate people would borrow from unsavoury people - making them illegal drives the high risk loan business underground into the hands of the Mafia. And then the consequences for the desperate people for defaulting is no longer bankruptcy, but broken legs or worse. > If you cap maximum interest rates then people who are deemed too 'high risk' will be refused credit. As a result, they will seek credit elsewhere. You could solve the loan shark problem and cap the interest rate by socializing the rest of the risk through some mechanism -- say a regulation that requires TBTF banks to offer payday loans and make up for the loss through their other products. Obviously there are details to be worked out, but the burden of a policy to combat loan sharking does not have to fall on the most vulnerable.
  - gruez 8y ago
    >say a regulation that requires TBTF banks to offer payday loans and make up for the loss through their other products but if banks are forced to make loans at a loss, aren't we effectively subsidizing people that don't repay loans? you might think this is a noble goal, but I'd doubt many people will be on board.
    - ardy42 8y ago
      > but if banks are forced to make loans at a loss, aren't we effectively subsidizing people that don't repay loans? you might think this is a noble goal, but I'd doubt many people will be on board. Perhaps, but I have little sympathy for the feelings of the better-off people who want to clutch every penny to the point that they are jealous of the help the needy might get. If they're able to block reforms, then I think efforts need to be made to change their attitudes.
- evandijk70 8y ago
  Most people will default before they will go to the mafia, which I think is a better solution than a payday loan
  - verbify 8y ago
    I'm struggling to follow your argument. You can also default on a payday loan - I think defaulting is better than the mafia, which is precisely the benefit of payday loans - they add in a step where you don't go to the mafia.
beaconstudios 8y ago
you'd presumably want to keep interest at around the level required to cover the defaulting rate, plus costs of operation. Any lower and you're essentially providing handouts - there's an argument to be had for that too (e.g. UBI, negative income tax) but it's a separate topic.
- CaptainZapp 8y ago
  you'd presumably want to keep interest at around the level required to cover the defaulting rate, plus costs of operation Add: Plus a profit to that But that seems to be covered. There are multiple banks who will provide credit to consumers at lower interest rates than that and obviously still can make a profit. Car loans are usually lower than that. Mortgages go for between 1 1/4 and 2% (last time I looked). The maximum rate of 15% is usually applicable for credit card debts.
  - CompelTechnic 8y ago
    It's interesting that the mortgages in Switzerland can go that low. I remember that in the eurozone banks are earning negative interest on their reserves due to european central bank policy. I doubt that you would see 1.25% mortgage rates if this were not the case- it very well may be that these rates are not profitable, but are at least less unprofitable than letting the money sit in reserve.
  - tyfon 8y ago
    (I work in a bank with unsecured loans). There is a saying, you can accept any customers you want as long as the price (interest rate) is correct. As a group you can manage this pretty well. For some segments of unsecured loans the default rates are high enough to warrant those interest rates. The customers who score better gets lower rates as there is competition in the market and they often shop around. Having too high rates gives a lot of not taken up loan offers which the managers hate. Car loans are almost impossible to lose money on especially the secured ones. It becomes a question of "how much can a person damage a car before it being repossessed". Usually the car is fine and one gets the money back as long as you don't loan out more than you expect can be recovered after said damage. That's why you can give so low interest rates. Unsecured car loans are much more expensive and often requires full coverage insurance. So yes, one can give out loans to lower interest rates than 15% but then you have to cut off the lower scoring customers that would not be profitable with that rate.
cascom 8y ago
The problem is that pay day loans are typically pretty small <$500 and meant to be short duration 1-8 weeks, meaning that if it’s a $500 loan out for one month @15% that is $6.2 in interest, it is going to cost more than that to process and administer the loan, let alone funding costs, default risk, etc.
- CaptainZapp 8y ago
  Which may explain why the businessmodel just doesn't exist in Switzerland.
hopler 8y ago
Switzerland has generous socialist programs, a strict immigration policy, and a little Nazi gold. Not highly relocatable.

glogla 8y ago

"Payday loans - we're slightly better than mafia!" You might want to rethink that slogan.

verbify 8y ago
On the contrary, I think you summed up my feelings pretty succinctly. Was there something I wrote that led you to think I felt otherwise?
- natpalmer1776 8y ago
  I think the issue here is that in an ideal world, neither would exist. The original reply to your comment suggests that this is not even being considered and thus is satirizing your rationale.
  - verbify 8y ago
    I think that's a charitable reading of the parent comment. I thought I made it clear that in an ideal world payday loans (and the mafia) wouldn't exist, so I'm not even sure what kind of ideal world the parent comment is suggesting.

pjc50 8y ago

The demand is not really "pre-existing", it's one created by the payday loan industry to a large extent. Especially by advertising their use for buying consumer goods. What tends to happen is not that people go to the Mafia (traditionally they come to you!), but that people make creditors of their utility companies and landlords by deferring payment. (The older alternative to unsecured very high interest short term loans is those secured on valuables - the pawn shop).

verbify 8y ago
I'm not sure about the laws in your locality (in the UK you have to have a licence from the UK Office of Fair Trading to offer consumer credit), but I would generally support banning anyone other than payday loan companies from selling very high interest loans - high interest loans from utility companies and landlords strikes me as an obscenity. > What tends to happen is not that people go to the Mafia (traditionally they come to you!) The mob definitely loans money at high-interest: http://archive.boston.com/news/world/europe/articles/2009/03/15/mafia_loan_sharks_making_a_killing/ http://archive.boston.com/news/world/europe/articles/2009/03... https://en.wikipedia.org/wiki/Loan_shark#Post-criminalization https://en.wikipedia.org/wiki/Loan_shark#Post-criminalizatio...
- pjc50 8y ago
  (also in the UK) > high interest loans from utility companies and landlords strikes me as an obscenity. My point is usually that this is a lot cheaper, since these don't usually charge interest at the payday rates. Utility companies have barriers to cutting you off. But ultimately people who have negative cashflow week-to-week are going to get in trouble. Limiting how much debt they can get in causes them to hit the buffers earlier, but less hard. (Incidentally, this is yet another major problem with "universal credit": paying it on a 6 week delay is designed to force people to use payday lenders!)
vinceguidry 8y ago
No, the demand is created by the people who are desperate. Let's not put the cart before the horse here. They're not going to go away even if the services do.

daddylonglegs 8y ago

I was told that the mafia in the US lost a lot of business with the rise of credit cards but I can't find a source for that. Some researchers say that people turn to payday loans not only because they don't have access to bank loans but because the charging structure for payday loans is transparent and up-front: "But most of the RiteCheck customers I interviewed had done the math and found that it was less expensive to use RiteCheck than to use a bank. In their experience, required minimum balances and fees for everything from ATM usage to account maintenance were going up." https://www.philadelphiafed.org/community-development/publications/cascade/84/04_why-do-the-unbanked-use-alternative-financial-services https://www.philadelphiafed.org/community-development/public... PS I'm not sure I'd call the payday lenders savoury myself, though they be less unsavoury than loan sharks.

coryfklein 8y ago

In the case of payday loans I don't think we have to worry about throwing the baby out with the bathwater. The number of people that will literally start turning to the Mafia for loans has got to be minuscule. On the other hand, the number of people who will no longer be bent over a barrel every day will be significantly improved.