5 ms·

> Loans with gigantic interest ruin lives. Playing the devil's advocate here...loans with interest rates higher than 36% are generally reserved for subprime le

by 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.
  - the_optimist 5y ago
    This has nothing to do with capitalism. Capitalism is merely private ownership of stuff. When people use the word “capitalism” like this, it inevitably sounds like a naive Marxist classism throwback. Anything bad is merely attributed to capitalism, and set aside the generations of economic nuance we have developed since the gestation of that dysfunctional construct.
    - jacquesm 5y ago
      > Capitalism is merely private ownership of stuff. That's a very narrow definition of capitalism. It's not just 'stuff' that is privately held, it is also the means to generate profit and a very large chunk of the available capital. The effects of that go way beyond just 'stuff', and can make it next to impossible for someone born at the bottom of the stack to work their way up. Of course, some inevitably succeed at this and they are held up with great fanfare to prove that 'the system works' but on average, if you are born at the bottom your life will likely continue to at that level of society without much chance of upward mobility because the system is stacked against you. And payday loans at exorbitant rates are a mechanism that keeps people down.
      - admax88qqq 5y ago
        You're basically defining capitalism as "some people have lots of money"
        yunohn 5y ago
        Yes, well, “capitalism” is built around “capital” aka money, assets, real estate, etc etc.
aj7 5y ago
A huge lobbying interest is devoted to protecting this industry. Opposition to minimum wage increases is one of their priorities.
stevesimmons 5y ago
> I don't know what the "right APR" is In the UK, the consumer finance regulator the FCA did an in depth analysis of subprime lending and concluded that "fair" maximum charges were interest rates of 0.8% per day and total costs (interest, fees and penalties) no more than the amount of the loan principal borrowed.
- gruez 5y ago
  >In the UK, the consumer finance regulator the FCA did an in depth analysis of subprime lending source? >and concluded that "fair" maximum charges were interest rates of 0.8% per day "fair" in this case being what? The interest rate being enough to offset defaults? Or enough to offset defaults + overhead + profit? >and total costs (interest, fees and penalties) no more than the amount of the loan principal borrowed. I find this baffling. 0.8% per day compounded for a year is 18.3%, but they say that total costs can be equal to the principal? That means the effective APR can be up to 100% (if borrowing for a year), more than 5x the "fair" APR from before. Speaking of which, why isn't the length of the loan factored in? Surely a 1 week loan should have a lower "total cost" than a one year loan?
  - elijaht 5y ago
    0.8% compounded for a year is ~1830% APR
    - gruez 5y ago
      You're right. I must have forgotten to convert the result back to percentage.
    - sokoloff 5y ago
      ~1730% (1.0 out of the 18.3 on the calculator is the principal).
  - stevesimmons 5y ago
    Source: https://www.fca.org.uk/news/press-releases/fca-confirms-price-cap-rules-payday-lenders https://www.fca.org.uk/news/press-releases/fca-confirms-pric... From this post: Martin Wheatley, the FCA's chief executive officer, said: 'I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers. 'For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.'
8note 5y ago
I'm not convinced that payday loans should be able to produce a profit? The subprime group seems like people who should be serviced by the government, rather than pushed into a worse place to extract what little value they have.
- mbesto 5y ago
  > I'm not convinced that payday loans should be able to produce a profit? So who in their right mind would provide such a service if there was no path to a profit? /headscratch
wpietri 5y ago
How much help do you think the devil really needs here?

by mbesto 5y ago

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.
- the_optimist 5y ago
  This has nothing to do with capitalism. Capitalism is merely private ownership of stuff. When people use the word “capitalism” like this, it inevitably sounds like a naive Marxist classism throwback. Anything bad is merely attributed to capitalism, and set aside the generations of economic nuance we have developed since the gestation of that dysfunctional construct.
  - jacquesm 5y ago
    > Capitalism is merely private ownership of stuff. That's a very narrow definition of capitalism. It's not just 'stuff' that is privately held, it is also the means to generate profit and a very large chunk of the available capital. The effects of that go way beyond just 'stuff', and can make it next to impossible for someone born at the bottom of the stack to work their way up. Of course, some inevitably succeed at this and they are held up with great fanfare to prove that 'the system works' but on average, if you are born at the bottom your life will likely continue to at that level of society without much chance of upward mobility because the system is stacked against you. And payday loans at exorbitant rates are a mechanism that keeps people down.
    - admax88qqq 5y ago
      You're basically defining capitalism as "some people have lots of money"
      - yunohn 5y ago
        Yes, well, “capitalism” is built around “capital” aka money, assets, real estate, etc etc.

aj7 5y ago

A huge lobbying interest is devoted to protecting this industry. Opposition to minimum wage increases is one of their priorities.

stevesimmons 5y ago

> I don't know what the "right APR" is In the UK, the consumer finance regulator the FCA did an in depth analysis of subprime lending and concluded that "fair" maximum charges were interest rates of 0.8% per day and total costs (interest, fees and penalties) no more than the amount of the loan principal borrowed.

gruez 5y ago
>In the UK, the consumer finance regulator the FCA did an in depth analysis of subprime lending source? >and concluded that "fair" maximum charges were interest rates of 0.8% per day "fair" in this case being what? The interest rate being enough to offset defaults? Or enough to offset defaults + overhead + profit? >and total costs (interest, fees and penalties) no more than the amount of the loan principal borrowed. I find this baffling. 0.8% per day compounded for a year is 18.3%, but they say that total costs can be equal to the principal? That means the effective APR can be up to 100% (if borrowing for a year), more than 5x the "fair" APR from before. Speaking of which, why isn't the length of the loan factored in? Surely a 1 week loan should have a lower "total cost" than a one year loan?
- elijaht 5y ago
  0.8% compounded for a year is ~1830% APR
  - gruez 5y ago
    You're right. I must have forgotten to convert the result back to percentage.
  - sokoloff 5y ago
    ~1730% (1.0 out of the 18.3 on the calculator is the principal).
- stevesimmons 5y ago
  Source: https://www.fca.org.uk/news/press-releases/fca-confirms-price-cap-rules-payday-lenders https://www.fca.org.uk/news/press-releases/fca-confirms-pric... From this post: Martin Wheatley, the FCA's chief executive officer, said: 'I am confident that the new rules strike the right balance for firms and consumers. If the price cap was any lower, then we risk not having a viable market, any higher and there would not be adequate protection for borrowers. 'For people who struggle to repay, we believe the new rules will put an end to spiralling payday debts. For most of the borrowers who do pay back their loans on time, the cap on fees and charges represents substantial protections.'

8note 5y ago

I'm not convinced that payday loans should be able to produce a profit? The subprime group seems like people who should be serviced by the government, rather than pushed into a worse place to extract what little value they have.

mbesto 5y ago
> I'm not convinced that payday loans should be able to produce a profit? So who in their right mind would provide such a service if there was no path to a profit? /headscratch

wpietri 5y ago

How much help do you think the devil really needs here?