11 ms·

If a loan is so risky that it requires greater than 36% interest, it should not be made. Loans with gigantic interest ruin lives.

cesarb 5y ago
> If a loan is so risky that it requires greater than 36% interest, it should not be made. Playing devil's advocate: it depends. When I was younger, there were times when, if you lent money at only 36% per month interest, you'd be losing money. You'd have to lend at rates higher than that, just to break even, no matter how low the risk was.
- rory 5y ago
  You mean because your country had high inflation?
pc86 5y ago
Buying my friend a beer because he lent me $20 three days ago works out to an astronomical APR. It doesn't mean doing so should be illegal. There's a time and place for everything and that probably includes high interest loans as well.
- tylerfontaine 5y ago
  I don't think anyone is suggesting that gratitude for good friendship should be regulated.
- the_optimist 5y ago
  The social negatives of difficult-to-discharge debt and Ponzi-rate lending (wherein debt service cannot be met by an underlying economic growth behavior) are horrific and easily preventable. Letting even one person fall into the pit is a social travesty.
- onion2k 5y ago
  I wouldn't be surprised if paying interest on loans in the form of alcoholic beverages is actually illegal if you don't have a liquor license.
- deleted 5y ago
  [deleted]
- aj7 5y ago
  It is not true that any business model you can think of should be allowed.
mbesto 5y ago
> Loans with gigantic interest ruin lives. Playing the devil's advocate here...loans with interest rates higher than 36% are generally reserved for subprime lending - payday loans being the most prominent. As long as we live in a society (talking US here) where minimum wages don't keep up with inflation and benefits, then these products in some sense need to exist to satisfy that subprime group. Otherwise it's literally impossible to create a profit on payday loans if these rates are much lower. Note - I don't know what the "right APR" is to make them profitable, but I certainly can fathom why there might be a 1000% interest rate on a 7 day loan of $100 so someone can get their car out of the pound so they can drive to work. The administrative overhead to lend $100 and only make pennies is simply not worth it. Also, yes gigantic interest rates ruin lives...more importantly predatory sales practices to get people to buy them. But maybe we should focus on why so many Americans get to that in the first place (looking at your healthcare) - thats a much easier market creation.
- kbenson 5y ago
  Yes, the type of loans that usually have these high APRs are along the lines of "we'll lend you $500 today, but we expect $550 or $600 on your next payday" (yielding an APR often well into the hundreds). The rates are high both because a) there's a high level of defaults and b) they aren't really secured by anything except for a pre-scheduled ACH from the bank, so collection is hard (and it doesn't go on regular credit reports). Some people make good use of these, as timely sources of money when there's not a lot of other options (not everyone has credit or saving or friends and family that can help). At the same time, it is extremely predatory, and the lenders are constantly trying to maximize the money they can get from people (such as rolling a new loan into the payment of the original, meaning only the interest is functionally required on the due date, and they get to skirt the laws of the loan required to be short term). It's one of those catch-22 situations where doing away with the market entirely hurts those you're trying to protect, but it's hard to regulate effectively because the benefit is it's quick and short, meaning too many hurdles might be the same effectively as doing away with them completely.
  - jacquesm 5y ago
    Capitalism works extremely well for those at the top, reasonably well for those in the middle and it can utterly suck for those at the bottom who effectively prop up the two other layers.
troupe 5y ago
Assuming that everyone is acting in their own best interest, then a 36%+ interest rate would only be used by someone who is in a situation where it is better than their alternatives. If the option was not available, then they wouldn't have the alternative that is best for them. If someone is NOT acting in their own best interest, then there are an infinite number of things that need to be removed from their options.
- baq 5y ago
  Standard humans routinely fail to correctly asses options. They can’t even if they’re aware they can’t. Economists are still coming to terms with how badly the rational choice theory predicts human behavior.
nostromo 5y ago
Say I live paycheck to paycheck and I need $500 to fix my car that I use to get to work until I get paid in a few weeks. Borrowing $500 for one month and paying $15 in interest would be completely worth it and beneficial to the borrower. That's what 36% annualized interest would look like for a single month. Do people get in trouble with debt? Yes. And that's why we have bankruptcy. But not everyone gets in trouble with debt. I don't think it's fair to make it unavailable to everyone to protect those that fall into arrears -- because, again, that's what bankruptcy is for.
- zozbot234 5y ago
  > Say I live paycheck to paycheck Well, that's your problem right there. Unless you have routine access to spending opportunities that yield more than 36% in yearly returns, which I'm going to assume is pretty unlikely.
  - renewiltord 5y ago
    The easiest way to yield that kind of return is aborting on pre-committed spending. In fact, that's the way the poor generate this kind of income. If they have $100 for food this month and a sudden expense needs $50, then that means they just go hungry until their budget hits $50 for food this month. What you do is you starve a day or two and sell your food bank food. Everyone is capable of generating income while depleting from stores.
  - baq 5y ago
    ‘Stop being poor’ is the usual advice given in that predicament.
    - dools 5y ago
      Don’t lean weird
- jacquesm 5y ago
  In other countries there are institutions such as municipal banks that will borrow you the money at a reasonably low interest rate. The US is fairly unique in having legal usury where loansharks are allowed to prey on poor people.
jdavis703 5y ago
I was in a recent emergency situation where I could’ve needed to spend thousands of dollars on the same day. I just don’t have that kind of liquidity. I can turn the required savings/stock in to cash with 3-5 days of lag. But not the same day. This is where a subprime loan would be useful as a bridge, and in that situation I don’t think it would ruin my life. Consumers know what’s best for them. As long as the APR is accurately advertised, I don’t see why people should be jammed up because some people think interest is a sin.
- raverbashing 5y ago
  If you have the collateral you don't need a subprime loan. >Consumers know what’s best for them. Yeah that didn't work out the last time
- YuriNiyazov 5y ago
  Just as an FYI: if you have stock in a regular brokerage account, you can take out a margin loan in cash immediately. It depends on the broker, but IME it's fairly common (e.g. Fidelity does it). Margin has a bad name as a "high risk" activity, but that's mostly when you have a concentrated position and are taking out a margin loan to double down on that concentrated position. Using margin as a bridge cash loan for a few days is a fairly low-risk proposition.
- freeone3000 5y ago
  Consumer credit cards aren't subprime lending; you're given an entire month of float before interest, and usually have sub-20% APRs. This is entirely different from a payday loan. Even a personal finance line of credit is much lower interest.
- pyrale 5y ago
  > Consumers know what’s best for them. The rest of the world would prefer you not to crash the world economy like it happened in 2008, for the sake of a clueless aphorism.
  - jdavis703 5y ago
kyrra 5y ago
As other have said, that's why bankruptcy exists. Also, loans like this aren't a 1-year repayment, it's a much shorter window, so you are not paying 36% more, you will pay likely in a shorter time window. While 36% looks bad, these kinds of loans can be helpful to people. Just because it looks scary to you, people go to these kinds of tools because they need them. When those tools are taken away, they will go down riskier paths, or fail to pay bills (which can lead to worse outcomes). Don't treat everyone like they can't think for themselves and understand what they are getting into. Sometimes solutions like these are needed.
Grimburger 5y ago
My parents had nearly 20% interest rates on their homeloan at one point. This isn't Valenzuela or Zimbabwe either, it's in Australia.
SilasX 5y ago
Ehhh I agree in general but if you want to say that universally, then you’re painting with too broad a brush. Like, wasn’t Google started with servers bought by maxing out a credit card at similar interest rates?
- TheDong 5y ago
  > wasn’t Google started with servers bought by maxing out a credit card at similar interest rates? This is some sort of fallacy, but I don't know the name of it. Anyway, as a counter point, I'm here from an alternative reality where we instead instituted this law limiting APR a year before google started. Google still managed to buy servers despite the law (I think that story's apocryphal, but even if it's true, they just got them at lower interest rates or got like 2 fewer servers and google was slower for a few months). However, in this alternate future, there's also another company that did a lot of really good things founded by someone who in this reality ended up the victim of a payday loan, penniless, and is still struggling with the after effects of declaring personal bankruptcy. His even-better-company didn't happen. Do you sorta see what I'm trying to say here? Maybe the fallacy is just a bias towards some specific vaguely related anecdotes over data? The sorta "I agree in general drunk driving is bad, but doesn't Steve Ballmer actually drives better while drunk so maybe it's too broad of a brush to outlaw it?"
  - SilasX 5y ago
    It would be more like, “Drunk driving is absolutely never acceptable” including taking your critical-condition friend one mile to a hospital on empty roads while you’re .08. Edit: also it seems like the fallacy would be in the other direction. Up through the Middle Ages, charging any interest at all was “usury”, because no one saw the difference between “non-exploitive business loans” vs preying on the desperate; the former was the bizarre special case, until the exception became the rule.
hchasestevens 5y ago
This is an easy statement to make, but I think, empirically speaking, it just doesn't line up with reality. For payday loans, where the terms have historically been in excess of 36%, the vast majority of borrowers: 1. Pay the loan on-time (more than 90%; Community Financial Services Association of America, "About the Payday Industry: Myth vs. Reality.") 2. Do not roll over the loan (same source) 3. Are able, in advance, to accurately predict when they will be able to pay off the loan ( https://scholarship.law.columbia.edu/faculty_scholarship/594/ https://scholarship.law.columbia.edu/faculty_scholarship/594... ) 4. Report having been satisfied with the experience as a whole ( http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.554.4055&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.554... ) Furthermore, evidence shows that, on the whole, loans of this nature prevent bankruptcy, foreclosure, bounced checks, and other outcomes ranging from extremely devastating to merely disruptive ( https://www.researchgate.net/publication/5051409_Payday_Holiday_How_Households_Fare_After_Payday_Credit_Bans https://www.researchgate.net/publication/5051409_Payday_Holi... ; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344397 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344397 ; https://digitalcommons.chapman.edu/economics_articles/104/ https://digitalcommons.chapman.edu/economics_articles/104/ ). I think fortunately/unfortunately, most HN readers won't be familiar with the benefits quick, easy access to capital can have for a person, especially those living on the margins of poverty, where missing one e.g. auto or phone payment can have cascading, long-lasting effects, such as losing a job. The nice thing about our distributed, relatively free-market economy though is that every person can act as an independent agent, analyze their own risk tolerance and ability to make responsible use of the financial products available to them, and make choices leveraging personal information that no centralized authority (or blanket rule, such as "loans with interest above 36% should not be permissible in any circumstance") could possibly have access to.

cesarb 5y ago

> If a loan is so risky that it requires greater than 36% interest, it should not be made. Playing devil's advocate: it depends. When I was younger, there were times when, if you lent money at only 36% per month interest, you'd be losing money. You'd have to lend at rates higher than that, just to break even, no matter how low the risk was.

rory 5y ago
You mean because your country had high inflation?

pc86 5y ago

Buying my friend a beer because he lent me $20 three days ago works out to an astronomical APR. It doesn't mean doing so should be illegal. There's a time and place for everything and that probably includes high interest loans as well.

tylerfontaine 5y ago
I don't think anyone is suggesting that gratitude for good friendship should be regulated.
the_optimist 5y ago
The social negatives of difficult-to-discharge debt and Ponzi-rate lending (wherein debt service cannot be met by an underlying economic growth behavior) are horrific and easily preventable. Letting even one person fall into the pit is a social travesty.
onion2k 5y ago
I wouldn't be surprised if paying interest on loans in the form of alcoholic beverages is actually illegal if you don't have a liquor license.
deleted 5y ago
[deleted]
aj7 5y ago
It is not true that any business model you can think of should be allowed.

mbesto 5y ago

> Loans with gigantic interest ruin lives. Playing the devil's advocate here...loans with interest rates higher than 36% are generally reserved for subprime lending - payday loans being the most prominent. As long as we live in a society (talking US here) where minimum wages don't keep up with inflation and benefits, then these products in some sense need to exist to satisfy that subprime group. Otherwise it's literally impossible to create a profit on payday loans if these rates are much lower. Note - I don't know what the "right APR" is to make them profitable, but I certainly can fathom why there might be a 1000% interest rate on a 7 day loan of $100 so someone can get their car out of the pound so they can drive to work. The administrative overhead to lend $100 and only make pennies is simply not worth it. Also, yes gigantic interest rates ruin lives...more importantly predatory sales practices to get people to buy them. But maybe we should focus on why so many Americans get to that in the first place (looking at your healthcare) - thats a much easier market creation.

kbenson 5y ago
Yes, the type of loans that usually have these high APRs are along the lines of "we'll lend you $500 today, but we expect $550 or $600 on your next payday" (yielding an APR often well into the hundreds). The rates are high both because a) there's a high level of defaults and b) they aren't really secured by anything except for a pre-scheduled ACH from the bank, so collection is hard (and it doesn't go on regular credit reports). Some people make good use of these, as timely sources of money when there's not a lot of other options (not everyone has credit or saving or friends and family that can help). At the same time, it is extremely predatory, and the lenders are constantly trying to maximize the money they can get from people (such as rolling a new loan into the payment of the original, meaning only the interest is functionally required on the due date, and they get to skirt the laws of the loan required to be short term). It's one of those catch-22 situations where doing away with the market entirely hurts those you're trying to protect, but it's hard to regulate effectively because the benefit is it's quick and short, meaning too many hurdles might be the same effectively as doing away with them completely.
- jacquesm 5y ago
  Capitalism works extremely well for those at the top, reasonably well for those in the middle and it can utterly suck for those at the bottom who effectively prop up the two other layers.

troupe 5y ago

Assuming that everyone is acting in their own best interest, then a 36%+ interest rate would only be used by someone who is in a situation where it is better than their alternatives. If the option was not available, then they wouldn't have the alternative that is best for them. If someone is NOT acting in their own best interest, then there are an infinite number of things that need to be removed from their options.

baq 5y ago
Standard humans routinely fail to correctly asses options. They can’t even if they’re aware they can’t. Economists are still coming to terms with how badly the rational choice theory predicts human behavior.

nostromo 5y ago

Say I live paycheck to paycheck and I need $500 to fix my car that I use to get to work until I get paid in a few weeks. Borrowing $500 for one month and paying $15 in interest would be completely worth it and beneficial to the borrower. That's what 36% annualized interest would look like for a single month. Do people get in trouble with debt? Yes. And that's why we have bankruptcy. But not everyone gets in trouble with debt. I don't think it's fair to make it unavailable to everyone to protect those that fall into arrears -- because, again, that's what bankruptcy is for.

zozbot234 5y ago
> Say I live paycheck to paycheck Well, that's your problem right there. Unless you have routine access to spending opportunities that yield more than 36% in yearly returns, which I'm going to assume is pretty unlikely.
- renewiltord 5y ago
  The easiest way to yield that kind of return is aborting on pre-committed spending. In fact, that's the way the poor generate this kind of income. If they have $100 for food this month and a sudden expense needs $50, then that means they just go hungry until their budget hits $50 for food this month. What you do is you starve a day or two and sell your food bank food. Everyone is capable of generating income while depleting from stores.
- baq 5y ago
  ‘Stop being poor’ is the usual advice given in that predicament.
  - dools 5y ago
    Don’t lean weird
jacquesm 5y ago
In other countries there are institutions such as municipal banks that will borrow you the money at a reasonably low interest rate. The US is fairly unique in having legal usury where loansharks are allowed to prey on poor people.

jdavis703 5y ago

I was in a recent emergency situation where I could’ve needed to spend thousands of dollars on the same day. I just don’t have that kind of liquidity. I can turn the required savings/stock in to cash with 3-5 days of lag. But not the same day. This is where a subprime loan would be useful as a bridge, and in that situation I don’t think it would ruin my life. Consumers know what’s best for them. As long as the APR is accurately advertised, I don’t see why people should be jammed up because some people think interest is a sin.

raverbashing 5y ago
If you have the collateral you don't need a subprime loan. >Consumers know what’s best for them. Yeah that didn't work out the last time
YuriNiyazov 5y ago
Just as an FYI: if you have stock in a regular brokerage account, you can take out a margin loan in cash immediately. It depends on the broker, but IME it's fairly common (e.g. Fidelity does it). Margin has a bad name as a "high risk" activity, but that's mostly when you have a concentrated position and are taking out a margin loan to double down on that concentrated position. Using margin as a bridge cash loan for a few days is a fairly low-risk proposition.
freeone3000 5y ago
Consumer credit cards aren't subprime lending; you're given an entire month of float before interest, and usually have sub-20% APRs. This is entirely different from a payday loan. Even a personal finance line of credit is much lower interest.
pyrale 5y ago
> Consumers know what’s best for them. The rest of the world would prefer you not to crash the world economy like it happened in 2008, for the sake of a clueless aphorism.
- jdavis703 5y ago

kyrra 5y ago

As other have said, that's why bankruptcy exists. Also, loans like this aren't a 1-year repayment, it's a much shorter window, so you are not paying 36% more, you will pay likely in a shorter time window. While 36% looks bad, these kinds of loans can be helpful to people. Just because it looks scary to you, people go to these kinds of tools because they need them. When those tools are taken away, they will go down riskier paths, or fail to pay bills (which can lead to worse outcomes). Don't treat everyone like they can't think for themselves and understand what they are getting into. Sometimes solutions like these are needed.

Grimburger 5y ago

My parents had nearly 20% interest rates on their homeloan at one point. This isn't Valenzuela or Zimbabwe either, it's in Australia.

SilasX 5y ago

Ehhh I agree in general but if you want to say that universally, then you’re painting with too broad a brush. Like, wasn’t Google started with servers bought by maxing out a credit card at similar interest rates?

TheDong 5y ago
> wasn’t Google started with servers bought by maxing out a credit card at similar interest rates? This is some sort of fallacy, but I don't know the name of it. Anyway, as a counter point, I'm here from an alternative reality where we instead instituted this law limiting APR a year before google started. Google still managed to buy servers despite the law (I think that story's apocryphal, but even if it's true, they just got them at lower interest rates or got like 2 fewer servers and google was slower for a few months). However, in this alternate future, there's also another company that did a lot of really good things founded by someone who in this reality ended up the victim of a payday loan, penniless, and is still struggling with the after effects of declaring personal bankruptcy. His even-better-company didn't happen. Do you sorta see what I'm trying to say here? Maybe the fallacy is just a bias towards some specific vaguely related anecdotes over data? The sorta "I agree in general drunk driving is bad, but doesn't Steve Ballmer actually drives better while drunk so maybe it's too broad of a brush to outlaw it?"
- SilasX 5y ago
  It would be more like, “Drunk driving is absolutely never acceptable” including taking your critical-condition friend one mile to a hospital on empty roads while you’re .08. Edit: also it seems like the fallacy would be in the other direction. Up through the Middle Ages, charging any interest at all was “usury”, because no one saw the difference between “non-exploitive business loans” vs preying on the desperate; the former was the bizarre special case, until the exception became the rule.

hchasestevens 5y ago

This is an easy statement to make, but I think, empirically speaking, it just doesn't line up with reality. For payday loans, where the terms have historically been in excess of 36%, the vast majority of borrowers: 1. Pay the loan on-time (more than 90%; Community Financial Services Association of America, "About the Payday Industry: Myth vs. Reality.") 2. Do not roll over the loan (same source) 3. Are able, in advance, to accurately predict when they will be able to pay off the loan ( https://scholarship.law.columbia.edu/faculty_scholarship/594/ https://scholarship.law.columbia.edu/faculty_scholarship/594... ) 4. Report having been satisfied with the experience as a whole ( http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.554.4055&rep=rep1&type=pdf http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.554... ) Furthermore, evidence shows that, on the whole, loans of this nature prevent bankruptcy, foreclosure, bounced checks, and other outcomes ranging from extremely devastating to merely disruptive ( https://www.researchgate.net/publication/5051409_Payday_Holiday_How_Households_Fare_After_Payday_Credit_Bans https://www.researchgate.net/publication/5051409_Payday_Holi... ; https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344397 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1344397 ; https://digitalcommons.chapman.edu/economics_articles/104/ https://digitalcommons.chapman.edu/economics_articles/104/ ). I think fortunately/unfortunately, most HN readers won't be familiar with the benefits quick, easy access to capital can have for a person, especially those living on the margins of poverty, where missing one e.g. auto or phone payment can have cascading, long-lasting effects, such as losing a job. The nice thing about our distributed, relatively free-market economy though is that every person can act as an independent agent, analyze their own risk tolerance and ability to make responsible use of the financial products available to them, and make choices leveraging personal information that no centralized authority (or blanket rule, such as "loans with interest above 36% should not be permissible in any circumstance") could possibly have access to.