7 ms·

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.
        dvtrn 8y ago
        Okay, then You can extrapolate 400% from this example. Consider me obscenely interested in understanding the math to break down measuring risk such that you end up with 400% annualized interest on a, say $1000 loan. Again, even traditional banks don't hit applicants with poor credit this hard. Personally, I paid off a personal loan with my credit union down in Texas, only financial institution that would give me one with my credit. 18%. I have yet to find anyone who can provide a convincing argument for why such a high interest rate is warranted compared to traditional lending sources who will have the exact same concerns and risks but charge demonstrably less.
        1123581321 8y ago
        Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though. Edit: in response to your edits, I think your credit union example is a good one. That is exactly why credit unions are valuable; they have a local/regional reach similar to payday, but they are cheaper, and they will lend to people that Bank of America, Chase, etc. won’t touch.
  - jstanley 8y ago
    If you think you could do it for less, why don't you? 200% returns would be yours for the taking!
    - rootusrootus 8y ago
      Because I would not enjoy it and life isn't all about maximizing your income.
- robert_foss 8y ago
  If my credit card had an APR of ~400% I would be ruined. Thankfully for me, I have enough financial assets that I will never have to take out a payday loan. But for people who desperately need money now, and have no other choice, they're forced to accept these rates. It's profiteering on the backs of the very weakest people in society. That's obscene to me. If this is indeed is a valuable service to society, cap the rates, and force them to be disclosed up front.
- azinman2 8y ago
  The annual rates are around 390%, and often cause bankruptcy: https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-rule-end-payday-debt-traps/ https://www.consumerfinance.gov/about-us/newsroom/consumer-f...
- dvtrn 8y ago
  What makes you think 300% interest on a financial instrument ISN'T obscene? I don't know of any other loan or line of credit with that kind of interest rate but payday loans.
  - calvinmorrison 8y ago
    Well basically because of the short duration and risk and small absolute value of the loans. To loan out $5000, often times a minimum from banks for a personal loan, I might have to do the overhead of 25 loans. The rates are much more reasonable when you consider that.
1123581321 8y ago
Do you think there is a level of default risk that justifies a higher interest rate?
- astura 8y ago
  Higher interest rates, sure, but at some point it moves from "providing a needed service" to intentionally predatory.

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.
      - dvtrn 8y ago
        Okay, then You can extrapolate 400% from this example. Consider me obscenely interested in understanding the math to break down measuring risk such that you end up with 400% annualized interest on a, say $1000 loan. Again, even traditional banks don't hit applicants with poor credit this hard. Personally, I paid off a personal loan with my credit union down in Texas, only financial institution that would give me one with my credit. 18%. I have yet to find anyone who can provide a convincing argument for why such a high interest rate is warranted compared to traditional lending sources who will have the exact same concerns and risks but charge demonstrably less.
        1123581321 8y ago
        Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though. Edit: in response to your edits, I think your credit union example is a good one. That is exactly why credit unions are valuable; they have a local/regional reach similar to payday, but they are cheaper, and they will lend to people that Bank of America, Chase, etc. won’t touch.
- jstanley 8y ago
  If you think you could do it for less, why don't you? 200% returns would be yours for the taking!
  - rootusrootus 8y ago
    Because I would not enjoy it and life isn't all about maximizing your income.
robert_foss 8y ago
If my credit card had an APR of ~400% I would be ruined. Thankfully for me, I have enough financial assets that I will never have to take out a payday loan. But for people who desperately need money now, and have no other choice, they're forced to accept these rates. It's profiteering on the backs of the very weakest people in society. That's obscene to me. If this is indeed is a valuable service to society, cap the rates, and force them to be disclosed up front.
azinman2 8y ago
The annual rates are around 390%, and often cause bankruptcy: https://www.consumerfinance.gov/about-us/newsroom/consumer-financial-protection-bureau-proposes-rule-end-payday-debt-traps/ https://www.consumerfinance.gov/about-us/newsroom/consumer-f...
dvtrn 8y ago
What makes you think 300% interest on a financial instrument ISN'T obscene? I don't know of any other loan or line of credit with that kind of interest rate but payday loans.
- calvinmorrison 8y ago
  Well basically because of the short duration and risk and small absolute value of the loans. To loan out $5000, often times a minimum from banks for a personal loan, I might have to do the overhead of 25 loans. The rates are much more reasonable when you consider that.

1123581321 8y ago

Do you think there is a level of default risk that justifies a higher interest rate?

astura 8y ago
Higher interest rates, sure, but at some point it moves from "providing a needed service" to intentionally predatory.