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I'm of the mind that many of these lenders are indeed predatory, but prohibiting loans to high-risk borrowers at realistic rates (based on the risk) just leaves

I'm of the mind that many of these lenders are indeed predatory, but prohibiting loans to high-risk borrowers at realistic rates (based on the risk) just leaves them unbanked rather than poorly-banked.

carbocation 8y ago
Payday loans are some of the things that the unbanked turn to. Using a payday loan shark does not make one banked.
- shhehebehdh 8y ago
  Your use of the term “loan shark” actually brings up an interesting question in my mind. I assume that some fraction of the people that would have otherwise gotten a payday loan will go to the black market. Do we know anything about these people and how numerous they are? Not saying that we should therefore allow paydays. Just curious about what the situation is.
- patio11 8y ago
  Payday loans structurally require you to be banked. The offering is "I will advance you $400 in cash today for a $415 check dated in a week. You can come back and buy your check back for $415. If you do not, I will deposit it." The security here _is the check drawn on your checking account_; without that the payday loan has markedly higher collection costs and markedly lower probability of collection. Also, they use the fact of writing a check to (in some jurisdictions) gain legal leverage that they would not otherwise have access to, because making someone a promise to pay and failing to follow through with it is generally under the notice of criminal law, but (in some jurisdictions) writing a check which one knows to be unbacked by funds is a criminal offense.
  - carbocation 8y ago
    I am not at all an expert in this field, and this kind of topic seems closer to things you've thought about for years. But, I was under the impression that people who use payday loans and have bank accounts are considered "underbanked," while those who truly have no bank accounts are considered the "unbanked." Maybe the distinction doesn't matter that much. In truth, I don't know enough to have a strong opinion.
  - juliusmusseau 8y ago
    I don't think they take cheques anymore. At least not in Canada? When I took out a payday loan they made me sign a PAD authorization (pre-authorized debit) that was timed to hit my account the same day as my next payroll. They also needed my last bank statement so they could 1.) verify my payroll was through direct deposit, and 2.) help them estimate the right date for their PAD. In other words: yup! You must be banked!
braythwayt 8y ago
If you read the article, there's a little more nuänce than that. One thing listed right up front is a limit on how many times a lender can try to withdraw funds from your account. If they have, say, a $200 NSF charge, and your payment bounces, they can try every business day, racking up $1,000 a week in NSF fees. Companies that do this kind of thing aren't trying to collect their original payments in good faith, they're trying to suck every last droplet of blood from those lenders who have a temporary problem but then get some money. Limiting attempts to two would stop that.
- i_am_proteus 8y ago
  Nonetheless, payday lenders are not exactly making money hand over fist. Predatory practices to recover as much money as possible are, in aggregate, a reflection on the risk profile (i.e. staggering default rate) of these borrowers. Prohibiting these practices with no replacement measures just raises the rate or reduces loan availability. Realistically, people who can't get even a (legal) payday loan often turn to places where someone breaks your legs when you don't repay.
  - scottlocklin 8y ago
    Erm, do you have evidence that payday lenders are not making money hand over fist? This is a large statement with no evidence. I'm assuming they're quite profitable and low risk, for the same reason I assume fast food is; you see them everywhere there are poor people. Making usury illegal has no downsides.
    - nopriorarrests 8y ago
      Some big lending companies issue bonds to finance their operations. And, ironically enough, these bonds are _high yield_, meaning market does not trust that these companies are making money hand over fist. Any negative macroeconomic shock (like recession) can easily raise average loan default rate 2-3x and sink payday lender business in a single quarter. Such is life.
  - CydeWeys 8y ago
munk-a 8y ago
I think the existence of these lenders is indicative of a larger problem and allowing them to profit in this manner brings very little benefit to anyone - better to address the mismatched cost of living and revive johnson's war on poverty
deckar01 8y ago
> Most borrowers use payday loans to cover ordinary living expenses over the course of months ... 69 percent used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; https://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why https://www.pewtrusts.org/en/research-and-analysis/reports/2... Pay day loans are primarily used as a way to prolong an unsustainable lifestyle. That is not banking. That is selling people a fantasy and helping them dig themselves deeper into a hole of debt.

carbocation 8y ago

Payday loans are some of the things that the unbanked turn to. Using a payday loan shark does not make one banked.

shhehebehdh 8y ago
Your use of the term “loan shark” actually brings up an interesting question in my mind. I assume that some fraction of the people that would have otherwise gotten a payday loan will go to the black market. Do we know anything about these people and how numerous they are? Not saying that we should therefore allow paydays. Just curious about what the situation is.
patio11 8y ago
Payday loans structurally require you to be banked. The offering is "I will advance you $400 in cash today for a $415 check dated in a week. You can come back and buy your check back for $415. If you do not, I will deposit it." The security here _is the check drawn on your checking account_; without that the payday loan has markedly higher collection costs and markedly lower probability of collection. Also, they use the fact of writing a check to (in some jurisdictions) gain legal leverage that they would not otherwise have access to, because making someone a promise to pay and failing to follow through with it is generally under the notice of criminal law, but (in some jurisdictions) writing a check which one knows to be unbacked by funds is a criminal offense.
- carbocation 8y ago
  I am not at all an expert in this field, and this kind of topic seems closer to things you've thought about for years. But, I was under the impression that people who use payday loans and have bank accounts are considered "underbanked," while those who truly have no bank accounts are considered the "unbanked." Maybe the distinction doesn't matter that much. In truth, I don't know enough to have a strong opinion.
- juliusmusseau 8y ago
  I don't think they take cheques anymore. At least not in Canada? When I took out a payday loan they made me sign a PAD authorization (pre-authorized debit) that was timed to hit my account the same day as my next payroll. They also needed my last bank statement so they could 1.) verify my payroll was through direct deposit, and 2.) help them estimate the right date for their PAD. In other words: yup! You must be banked!

braythwayt 8y ago

If you read the article, there's a little more nuänce than that. One thing listed right up front is a limit on how many times a lender can try to withdraw funds from your account. If they have, say, a $200 NSF charge, and your payment bounces, they can try every business day, racking up $1,000 a week in NSF fees. Companies that do this kind of thing aren't trying to collect their original payments in good faith, they're trying to suck every last droplet of blood from those lenders who have a temporary problem but then get some money. Limiting attempts to two would stop that.

i_am_proteus 8y ago
Nonetheless, payday lenders are not exactly making money hand over fist. Predatory practices to recover as much money as possible are, in aggregate, a reflection on the risk profile (i.e. staggering default rate) of these borrowers. Prohibiting these practices with no replacement measures just raises the rate or reduces loan availability. Realistically, people who can't get even a (legal) payday loan often turn to places where someone breaks your legs when you don't repay.
- scottlocklin 8y ago
  Erm, do you have evidence that payday lenders are not making money hand over fist? This is a large statement with no evidence. I'm assuming they're quite profitable and low risk, for the same reason I assume fast food is; you see them everywhere there are poor people. Making usury illegal has no downsides.
  - nopriorarrests 8y ago
    Some big lending companies issue bonds to finance their operations. And, ironically enough, these bonds are _high yield_, meaning market does not trust that these companies are making money hand over fist. Any negative macroeconomic shock (like recession) can easily raise average loan default rate 2-3x and sink payday lender business in a single quarter. Such is life.
- CydeWeys 8y ago

munk-a 8y ago

I think the existence of these lenders is indicative of a larger problem and allowing them to profit in this manner brings very little benefit to anyone - better to address the mismatched cost of living and revive johnson's war on poverty

deckar01 8y ago

> Most borrowers use payday loans to cover ordinary living expenses over the course of months ... 69 percent used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; https://www.pewtrusts.org/en/research-and-analysis/reports/2012/07/19/who-borrows-where-they-borrow-and-why https://www.pewtrusts.org/en/research-and-analysis/reports/2... Pay day loans are primarily used as a way to prolong an unsustainable lifestyle. That is not banking. That is selling people a fantasy and helping them dig themselves deeper into a hole of debt.