4 ms·

Honest question -- what's stopping anyone from entering the market, offering much lower interest rates than that, and outcompeting all existing participants?

wutbrodo 6y ago
They do. GP, like so many in this thread, has a poor grasp on the logic here. They're referring to the _maximum_ allowable rate.
geoduck14 6y ago
The people that take a pay day loan aren't necessarily maximizing for cost effectiveness. Consider someone who got a flat tire and it needs to be replaced before the person can go to work. The cost of replacing a tire can be $100-$200. The cost of waiting could cost their job. They could apply for a credit card with 18% interest and a bunch of fees - and the card MIGHT be delivered the next day. OR they can go to a pay day lender and borrow $100 NOW and get to their job this afternoon. The tire replacement "should" have cost $100 - now it costs $121, and they keep their job. You might imagine a similar situation for: your fridge broke and you NEED to keep your food fresh, your heater/AC broke, someone broke your front door trying to rob you. Life SUCKS if you are poor. Actual story: I met someone who was returning home on a bus, but was kicked off after having a seizure. She and her bf couldn't afford a new bus ticket to get home (to LA). They were stuck in Houston for at least a week, it is possible they missed work and were fired and missed rent and were evicted. If that was you, how much would you be willing to pay for $500 now? I didn't know them long enough to know if they were telling the truth, but I wish I had given them money.
- boring_twenties 6y ago
  I'm not sure what this has to do with my question. I'm not asking why the customer doesn't just go to a bank instead. I'm asking what's stopping you or me from opening a competing payday loan service that charges "only" $110 instead of $121. It seems to me that this should be a highly competitive industry, the only barriers to entry being some capital, a storefront in a cheap part of town, and a little physical security? What am I missing?
  - geoduck14 6y ago
    Oh! Sorry, I totally missed that. Background: I work at a bank, we specialize in Credit Cards - but I'm in the car finance division. Some of what I have here is an educated guess. Pay day lenders IS highly competitive. In certain geographies, there are LOTS of lenders. There are some very real barriers to entry: You have to be credited with certain financial regulators (CFPB and OCC are the 2 I know of) to lend money - and these regulators come with various stipulations (e.g., keep $ in reserve, don't be racist, lend to people who can pay you back, etc) Many "real" banks avoid this market because the regulators "punish" us - our Credit Card division would be held to a higher standard because we also had pay day loans. Fun fact: during the Obama administration, we also had Mortgages, because regulators "went easy" on the rest of the company. When Trump became president, regulators stopped caring and we sold our mortgages. All of this being said, if you, right NOW had a lemonade stand lending money to people, you could probably get away with it. On that note, there is a really interesting shift in the market: Financial Services As A Service. Imagine: Bank of Small-Town-Maine is a legitimate bank. They know how to stay solvent, they are registered with the right regulators, etc. I approach them and say "let me use your Certifications, I'll use my money, my marketing, I'll buy Identification Services and Credit services - I'll lend money to people and we split the profit". ACE Cash Express is doing something like this RIGHT NOW - and there are MANY other people doing it, too.
- nradov 6y ago
  Waiting a day for a credit card isn't the issue. Many auto repair shops now offer instant financing through partnerships with third-party lenders. The problem is that the customers have low credit scores and don't qualify for regular loans.
  - geoduck14 6y ago
    You are right, and I'll add something, too: the 3rd party financiers will sometimes lend to the low credit score people, but they charge high rates like the payday lenders And on the point, financing your home appliances is a popular thing (but please, pay up front!)

wutbrodo 6y ago

They do. GP, like so many in this thread, has a poor grasp on the logic here. They're referring to the _maximum_ allowable rate.

geoduck14 6y ago

The people that take a pay day loan aren't necessarily maximizing for cost effectiveness. Consider someone who got a flat tire and it needs to be replaced before the person can go to work. The cost of replacing a tire can be $100-$200. The cost of waiting could cost their job. They could apply for a credit card with 18% interest and a bunch of fees - and the card MIGHT be delivered the next day. OR they can go to a pay day lender and borrow $100 NOW and get to their job this afternoon. The tire replacement "should" have cost $100 - now it costs $121, and they keep their job. You might imagine a similar situation for: your fridge broke and you NEED to keep your food fresh, your heater/AC broke, someone broke your front door trying to rob you. Life SUCKS if you are poor. Actual story: I met someone who was returning home on a bus, but was kicked off after having a seizure. She and her bf couldn't afford a new bus ticket to get home (to LA). They were stuck in Houston for at least a week, it is possible they missed work and were fired and missed rent and were evicted. If that was you, how much would you be willing to pay for $500 now? I didn't know them long enough to know if they were telling the truth, but I wish I had given them money.

boring_twenties 6y ago
I'm not sure what this has to do with my question. I'm not asking why the customer doesn't just go to a bank instead. I'm asking what's stopping you or me from opening a competing payday loan service that charges "only" $110 instead of $121. It seems to me that this should be a highly competitive industry, the only barriers to entry being some capital, a storefront in a cheap part of town, and a little physical security? What am I missing?
- geoduck14 6y ago
  Oh! Sorry, I totally missed that. Background: I work at a bank, we specialize in Credit Cards - but I'm in the car finance division. Some of what I have here is an educated guess. Pay day lenders IS highly competitive. In certain geographies, there are LOTS of lenders. There are some very real barriers to entry: You have to be credited with certain financial regulators (CFPB and OCC are the 2 I know of) to lend money - and these regulators come with various stipulations (e.g., keep $ in reserve, don't be racist, lend to people who can pay you back, etc) Many "real" banks avoid this market because the regulators "punish" us - our Credit Card division would be held to a higher standard because we also had pay day loans. Fun fact: during the Obama administration, we also had Mortgages, because regulators "went easy" on the rest of the company. When Trump became president, regulators stopped caring and we sold our mortgages. All of this being said, if you, right NOW had a lemonade stand lending money to people, you could probably get away with it. On that note, there is a really interesting shift in the market: Financial Services As A Service. Imagine: Bank of Small-Town-Maine is a legitimate bank. They know how to stay solvent, they are registered with the right regulators, etc. I approach them and say "let me use your Certifications, I'll use my money, my marketing, I'll buy Identification Services and Credit services - I'll lend money to people and we split the profit". ACE Cash Express is doing something like this RIGHT NOW - and there are MANY other people doing it, too.
nradov 6y ago
Waiting a day for a credit card isn't the issue. Many auto repair shops now offer instant financing through partnerships with third-party lenders. The problem is that the customers have low credit scores and don't qualify for regular loans.
- geoduck14 6y ago
  You are right, and I'll add something, too: the 3rd party financiers will sometimes lend to the low credit score people, but they charge high rates like the payday lenders And on the point, financing your home appliances is a popular thing (but please, pay up front!)