17 ms·

What do you think about the idea that if someone is charging 20% on a loan and making easy money, you can offer the same service for 15% and take their business

What do you think about the idea that if someone is charging 20% on a loan and making easy money, you can offer the same service for 15% and take their business?* That is a race to the bottom, but it seems like it would be good for the customer. * This is essentially what credit unions do with signature loans.

mikeash 8y ago
Can you really? Do payday loan customers typically comparison shop?
- robert_foss 8y ago
  To further reinforce this point, find me a payday lender that up-front lists their Annual Percentage Rate. They really don't which makes comparisons impossible or very hard work.
  - mikeash 8y ago
    Sure, but everyone who needs their car repaired today so they don’t get fired tomorrow definitely takes the time to survey all of their local payday lenders, then sits down with a calculator and carefully works out how much each one will ultimately cost them before choosing the cheapest one. (Hopefully obvious sarcasm is obvious, but one can never tell.)
- cr0sh 8y ago
  > Do payday loan customers typically comparison shop? I'd say that if they were savvy enough to comparison shop, they wouldn't be payday loan customers. Look at the person in the article, Angela. She started out @ $300 for approximately $75.00 interest (25%). But now she owes who-knows-how-much with a yearly interest rate of 300%! Yet she still thinks she could pay it back! She did this because she doesn't trust herself with credit cards; the truth should be she shouldn't trust herself to borrow and pay back loans without incurring further debt and higher interest rates. Had she actually comparison-shopped, she would've found that a credit card - if she could get one - would likely have had a lower interest rate over the same time period, and couldn't rise anywhere near what the yearly rate she has now with the payday loan company. This is definitely predatory lending; these companies are lending to people who don't seem to have an understanding of certain basic financial concepts, or if they do, they don't have any clue how it will impact them. It would be a different case if the borrowers all knew that "yes, this is a crap loan with bad interest, but I don't have a choice, and I know I have to pay it back fast or I'm hosed". Some of them do. But I would wager that the vast majority don't, for a variety of reasons, not all of them due to ignorance (I imagine for some there might be some cultural and/or language barriers as well). These companies are taking extreme advantage of this, to their profit and to their customers detriment. The really astounding thing are their customers, like Angela, who seem to think all of this happening is a good thing. I just really don't understand this kind of mindset, of borrowing money at any and all costs with little to gain in the end (it isn't like all of these people are borrowing money to make an investment in some manner, to make a larger gain and pay back the loan with extra in their pocket - maybe some are, but I doubt they are in the majority). If you need an unsecured loan for something you can't afford to pay cash for today, you likely won't be able to afford to pay off the loan for it tomorrow. If you can - then you must. You don't just keep taking out more loans to keep covering the old loans (which is how a lot of these lenders work; the borrower finds they are unable to pay back the loan plus interest when the note comes due, so the lender extends the loan and ups the rate a bit - rinse and repeat until they default).
- 1123581321 8y ago
  Yes, typically through word-of-mouth reputation.
robert_foss 8y ago
If the 'invisible hand of the market' was indeed working, why are such obscene rates common? In my mind it's profiteering on the backs of impoverished people.
- calvinmorrison 8y ago
  What makes you think the rates are obscene?
  - rootusrootus 8y ago
    Is there really any debate on whether or not 400% is obscene?
    - 1123581321 8y ago
      If you were asked to lend someone you knew was unqualified for a traditional bank loan $200 for a week, and you had to fill out paperwork, create a record, etc., how much would you want them to give back? If they gave you $205 ($5 for your trouble) you’d be roughly charging 130% APR and you wouldn’t cover your costs, let alone the risk. You can extrapolate 400% from this example. Understanding how short duration, risk and operational overhead affects the rate is key to effective regulation in this industry.
      - dvtrn 8y ago
        Curious, but do you work in banking? I'm just wondering what else could potentially be motivating someone into thinking 400% interest on a short term loan that is by definition meant to be paid off on the next payday (anywhere from a week to fifteen days, or in some cases a month for individuals on a monthly/State-employee payroll) is anything but exploitative. BANKS don't even give out personal loans at such absurd rates.
        1123581321 8y ago
        I used to work for a credit union that had a branch in a very troubled low income area. We worked really hard to get people to consider us as a cheaper, more transparent and ethical alternative to payday lending. So I know a lot about it as competition. Nowhere I’ve said it’s not exploitative. However, exploitative doesn’t mean that a high interest rate is extremely profitable as is popularly believed. To clarify, payday lenders exploit people by a) encouraging loans for bad reasons, b) hiding details from financially illiterate people, c) trying to keep competition out of their market, d) not publishing comparable rates. But the actual business margins are not as good as 50-400% sounds due to the high volume/short duration/default risk.
odorousrex 8y ago
This assumes people are A) rational and B) intelligent enough to shop around. Neither is true. It's quite likely that the company making 20% has a much higher marketing budget than the 15% one. People can't choose the cheaper option if they don't know about it.
- SegFaultx64 8y ago
  Also many who end up taking these loans don't have reliable access to transportation, making shopping around logistically difficult.
- 1123581321 8y ago
  Yes, I would suggest looking at how people comparison shop dollar stores and convenient stores to understand payday loans if you aren’t able to talk to customers directly. Rather than a comprehensive review, calling, etc., they tend to build up a body of experience (which can be shared with others) and make changes over time. It’s certainly not optimized behavior, but since the loans are frequent and short term, there is opportunity to correct course as opposed to something like a mortgage.

mikeash 8y ago

Can you really? Do payday loan customers typically comparison shop?

robert_foss 8y ago
To further reinforce this point, find me a payday lender that up-front lists their Annual Percentage Rate. They really don't which makes comparisons impossible or very hard work.
- mikeash 8y ago
  Sure, but everyone who needs their car repaired today so they don’t get fired tomorrow definitely takes the time to survey all of their local payday lenders, then sits down with a calculator and carefully works out how much each one will ultimately cost them before choosing the cheapest one. (Hopefully obvious sarcasm is obvious, but one can never tell.)
cr0sh 8y ago
> Do payday loan customers typically comparison shop? I'd say that if they were savvy enough to comparison shop, they wouldn't be payday loan customers. Look at the person in the article, Angela. She started out @ $300 for approximately $75.00 interest (25%). But now she owes who-knows-how-much with a yearly interest rate of 300%! Yet she still thinks she could pay it back! She did this because she doesn't trust herself with credit cards; the truth should be she shouldn't trust herself to borrow and pay back loans without incurring further debt and higher interest rates. Had she actually comparison-shopped, she would've found that a credit card - if she could get one - would likely have had a lower interest rate over the same time period, and couldn't rise anywhere near what the yearly rate she has now with the payday loan company. This is definitely predatory lending; these companies are lending to people who don't seem to have an understanding of certain basic financial concepts, or if they do, they don't have any clue how it will impact them. It would be a different case if the borrowers all knew that "yes, this is a crap loan with bad interest, but I don't have a choice, and I know I have to pay it back fast or I'm hosed". Some of them do. But I would wager that the vast majority don't, for a variety of reasons, not all of them due to ignorance (I imagine for some there might be some cultural and/or language barriers as well). These companies are taking extreme advantage of this, to their profit and to their customers detriment. The really astounding thing are their customers, like Angela, who seem to think all of this happening is a good thing. I just really don't understand this kind of mindset, of borrowing money at any and all costs with little to gain in the end (it isn't like all of these people are borrowing money to make an investment in some manner, to make a larger gain and pay back the loan with extra in their pocket - maybe some are, but I doubt they are in the majority). If you need an unsecured loan for something you can't afford to pay cash for today, you likely won't be able to afford to pay off the loan for it tomorrow. If you can - then you must. You don't just keep taking out more loans to keep covering the old loans (which is how a lot of these lenders work; the borrower finds they are unable to pay back the loan plus interest when the note comes due, so the lender extends the loan and ups the rate a bit - rinse and repeat until they default).
1123581321 8y ago
Yes, typically through word-of-mouth reputation.

robert_foss 8y ago

If the 'invisible hand of the market' was indeed working, why are such obscene rates common? In my mind it's profiteering on the backs of impoverished people.

calvinmorrison 8y ago
What makes you think the rates are obscene?
- rootusrootus 8y ago
  Is there really any debate on whether or not 400% is obscene?
  - 1123581321 8y ago
    If you were asked to lend someone you knew was unqualified for a traditional bank loan $200 for a week, and you had to fill out paperwork, create a record, etc., how much would you want them to give back? If they gave you $205 ($5 for your trouble) you’d be roughly charging 130% APR and you wouldn’t cover your costs, let alone the risk. You can extrapolate 400% from this example. Understanding how short duration, risk and operational overhead affects the rate is key to effective regulation in this industry.
    - dvtrn 8y ago
      Curious, but do you work in banking? I'm just wondering what else could potentially be motivating someone into thinking 400% interest on a short term loan that is by definition meant to be paid off on the next payday (anywhere from a week to fifteen days, or in some cases a month for individuals on a monthly/State-employee payroll) is anything but exploitative. BANKS don't even give out personal loans at such absurd rates.
      - 1123581321 8y ago
        I used to work for a credit union that had a branch in a very troubled low income area. We worked really hard to get people to consider us as a cheaper, more transparent and ethical alternative to payday lending. So I know a lot about it as competition. Nowhere I’ve said it’s not exploitative. However, exploitative doesn’t mean that a high interest rate is extremely profitable as is popularly believed. To clarify, payday lenders exploit people by a) encouraging loans for bad reasons, b) hiding details from financially illiterate people, c) trying to keep competition out of their market, d) not publishing comparable rates. But the actual business margins are not as good as 50-400% sounds due to the high volume/short duration/default risk.

odorousrex 8y ago

This assumes people are A) rational and B) intelligent enough to shop around. Neither is true. It's quite likely that the company making 20% has a much higher marketing budget than the 15% one. People can't choose the cheaper option if they don't know about it.

SegFaultx64 8y ago
Also many who end up taking these loans don't have reliable access to transportation, making shopping around logistically difficult.
1123581321 8y ago
Yes, I would suggest looking at how people comparison shop dollar stores and convenient stores to understand payday loans if you aren’t able to talk to customers directly. Rather than a comprehensive review, calling, etc., they tend to build up a body of experience (which can be shared with others) and make changes over time. It’s certainly not optimized behavior, but since the loans are frequent and short term, there is opportunity to correct course as opposed to something like a mortgage.