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Clearly there is a need for something like payday loans, where people in dire straits can get small cash infusion to get them by. It also seems to be the genera

Clearly there is a need for something like payday loans, where people in dire straits can get small cash infusion to get them by. It also seems to be the general consensus that these same people are "high-risk", and so require higher interest rates. So what's the solution to this problem? Clearly a lot of (maybe all) of the payday loan-type places are evil -- is there a way to service these customers without being evil? Would a not-for-profit (or perhaps even a not-for-an-exorbitant-profit) payday loan organization be possible? Or would the typical nasty collections process, the thousands of dollars of interest on a $500 loan still be required, even if the people at the top weren't becoming millionaires? I guess what I'm asking is, in the story, we see someone paying something like $3900 on a $700 loan, made by one of these evil companies. What would their total bill be if the loan was made by a non-profit organization? Would it be more like $1000, or still closer to $3900?

brational 12y ago
That's pretty difficult to surmise given you don't know how much of the interest is for profit vs how much covers risk of defaulters. Arbitrarily, of that $700 turned $3900 loan a non-profit might still need to run it $3500 just to cover all the other loans that they receive nothing from.
akgerber 12y ago
There are proposals to bring back postal banking, including small loans: http://www.slate.com/articles/news_and_politics/history/2014/08/postal_banking_already_worked_in_the_usa_and_it_will_work_again.2.html http://www.slate.com/articles/news_and_politics/history/2014...
a-priori 12y ago
Instead of this, set up a non-profit payday loan company that offers loans at market rates, but uses the profits from the loans to offer free financial planning and education for its customers.
- refurb 12y ago
  Market rates? You mean the same rate that people with good credit get? I'm guessing there would be no profit in such a situation.
  - a-priori 12y ago
    No, by 'market rate' I mean what other payday loan shops are charging in the area. The real problem isn't the loan itself, even if it seems exploitative: if someone is in a cash crunch, it's perfectly rational to pay something like $20 to get $200 today (that seems to be what places near me advertise, at least as introductory rates) so they can pay their rent and not be evicted. The problem is the cycle they get into where then they're $20 behind for the next one. Then they get another loan and they're $40 behind for the next one, and so on. So you catch people that are already in the cycle, fix their immediate need (they need $200 to pay their rent), then help them figure out a way to solve the larger problem (have cash on hand in time for next month's rent) and break out of the cycle. So the 'mission' of the shop would become to put themselves and all other payday loan shops in the area out of business due to a lack of customers. Of course, this assumes that the root problem is a lack of planning or education about personal finance. Maybe an outsider's perspective would help. Or maybe that's completely the wrong assumptions, I don't know.
- nedwin 12y ago
  I believe if you offered market rates on these high risk loans there wouldn't be any profit. The default rate is too high to allow for market rates.
psaintla 12y ago
I really hate to defend payday lenders but payday loans are VERY high risk. Everyone always hears about the poor person who paid $3900 in interest on a $700 loan but no one ever hears about the eight other people who took out $500 loans then never paid them back. I'm not sure a non-profit org would do well in this sector, it's not for the faint of heart.
at-fates-hands 12y ago
Isn't this why Pawn Shops exist? In most states, pawn shops can't charge over 4% interest on a loan so the interest doesn't compile nearly as fast as a payday loan place. The only issue is not having something that gives you enough collateral to get the loan in the first place.
jkaunisv1 12y ago
I was thinking this very thing yesterday as I walked down the street past a payday loan shop. I see no reason one couldn't open their own competitor with slightly lower rates and then ratchet down until you're just profitable enough to continue while giving the best deals to the people who need it. I feel like it's similar to how credit unions do what banks do, but in their customers' interest rather than the owners.
- otakucode 12y ago
  > I see no reason one couldn't open their own competitor with slightly lower rates You would have a very difficult time attracting customers. Ignoring the fact that much of the payday loan industry is run by organized crime and you would likely end up with a bullet in the back of your head, even if it were totally safe you would get very little advantage from offering a lower interest rate. Studies have shown that people in economic trouble are not capable of making wise choices. It's commonly referred to as 'decision fatigue'.
  - jkaunisv1 12y ago
    I have no knowledge of who runs the industry, but assuming it's perfectly safe - I'm not looking for an advantage. I'm talking about a social enterprise that disguises itself as a sleazy payday loan place, same kind of branding and everything but with more favourable terms for the customer. I'm guessing geographical location is the biggest factor in influencing their 'choice' of payday loan shop to use, so it would be a matter of taking advantage of that decision fatigue to help them without them realizing it.
anon808 12y ago
Just because there's a need for something, doesn't mean it should exist.
- refurb 12y ago
  So your opinion is that people with bad credit who need money should have no way of getting a loan? Why do you think that's better than the current situation?
  - anon808 12y ago
    How many of the people need these loans for food/shelter/health?
    - refurb 12y ago
      I would guess quite a few, if only indirectly.
      - anon808 12y ago
        see https://news.ycombinator.com/item?id=8274762 https://news.ycombinator.com/item?id=8274762
tdees40 12y ago
Credit isn't for everyone! This is why there are ancient provisions in most religions against lending to the poor. It rarely helps them and often makes their lives much worse. If they need something so desperately (food, shelter, etc), private charity or government assistance seems like a better means of providing it than payday lenders.
- deedubaya 12y ago
  It would be interesting to know what the small loans are actually being used for. Are they being spent on healthcare bills? Clothes for their children? Or are they being used to pay off another bad debt like a credit card?
  - tdees40 12y ago
    Equally interesting is that they tend to pay them back by hitting up their relatives for cash (which would have probably been a better idea in the first place!). http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-payday-loans/ http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-...

brational 12y ago

That's pretty difficult to surmise given you don't know how much of the interest is for profit vs how much covers risk of defaulters. Arbitrarily, of that $700 turned $3900 loan a non-profit might still need to run it $3500 just to cover all the other loans that they receive nothing from.

akgerber 12y ago

There are proposals to bring back postal banking, including small loans: http://www.slate.com/articles/news_and_politics/history/2014/08/postal_banking_already_worked_in_the_usa_and_it_will_work_again.2.html http://www.slate.com/articles/news_and_politics/history/2014...

a-priori 12y ago

Instead of this, set up a non-profit payday loan company that offers loans at market rates, but uses the profits from the loans to offer free financial planning and education for its customers.

refurb 12y ago
Market rates? You mean the same rate that people with good credit get? I'm guessing there would be no profit in such a situation.
- a-priori 12y ago
  No, by 'market rate' I mean what other payday loan shops are charging in the area. The real problem isn't the loan itself, even if it seems exploitative: if someone is in a cash crunch, it's perfectly rational to pay something like $20 to get $200 today (that seems to be what places near me advertise, at least as introductory rates) so they can pay their rent and not be evicted. The problem is the cycle they get into where then they're $20 behind for the next one. Then they get another loan and they're $40 behind for the next one, and so on. So you catch people that are already in the cycle, fix their immediate need (they need $200 to pay their rent), then help them figure out a way to solve the larger problem (have cash on hand in time for next month's rent) and break out of the cycle. So the 'mission' of the shop would become to put themselves and all other payday loan shops in the area out of business due to a lack of customers. Of course, this assumes that the root problem is a lack of planning or education about personal finance. Maybe an outsider's perspective would help. Or maybe that's completely the wrong assumptions, I don't know.
nedwin 12y ago
I believe if you offered market rates on these high risk loans there wouldn't be any profit. The default rate is too high to allow for market rates.

psaintla 12y ago

I really hate to defend payday lenders but payday loans are VERY high risk. Everyone always hears about the poor person who paid $3900 in interest on a $700 loan but no one ever hears about the eight other people who took out $500 loans then never paid them back. I'm not sure a non-profit org would do well in this sector, it's not for the faint of heart.

at-fates-hands 12y ago

Isn't this why Pawn Shops exist? In most states, pawn shops can't charge over 4% interest on a loan so the interest doesn't compile nearly as fast as a payday loan place. The only issue is not having something that gives you enough collateral to get the loan in the first place.

jkaunisv1 12y ago

I was thinking this very thing yesterday as I walked down the street past a payday loan shop. I see no reason one couldn't open their own competitor with slightly lower rates and then ratchet down until you're just profitable enough to continue while giving the best deals to the people who need it. I feel like it's similar to how credit unions do what banks do, but in their customers' interest rather than the owners.

otakucode 12y ago
> I see no reason one couldn't open their own competitor with slightly lower rates You would have a very difficult time attracting customers. Ignoring the fact that much of the payday loan industry is run by organized crime and you would likely end up with a bullet in the back of your head, even if it were totally safe you would get very little advantage from offering a lower interest rate. Studies have shown that people in economic trouble are not capable of making wise choices. It's commonly referred to as 'decision fatigue'.
- jkaunisv1 12y ago
  I have no knowledge of who runs the industry, but assuming it's perfectly safe - I'm not looking for an advantage. I'm talking about a social enterprise that disguises itself as a sleazy payday loan place, same kind of branding and everything but with more favourable terms for the customer. I'm guessing geographical location is the biggest factor in influencing their 'choice' of payday loan shop to use, so it would be a matter of taking advantage of that decision fatigue to help them without them realizing it.

anon808 12y ago

Just because there's a need for something, doesn't mean it should exist.

refurb 12y ago
So your opinion is that people with bad credit who need money should have no way of getting a loan? Why do you think that's better than the current situation?
- anon808 12y ago
  How many of the people need these loans for food/shelter/health?
  - refurb 12y ago
    I would guess quite a few, if only indirectly.
    - anon808 12y ago
      see https://news.ycombinator.com/item?id=8274762 https://news.ycombinator.com/item?id=8274762

tdees40 12y ago

Credit isn't for everyone! This is why there are ancient provisions in most religions against lending to the poor. It rarely helps them and often makes their lives much worse. If they need something so desperately (food, shelter, etc), private charity or government assistance seems like a better means of providing it than payday lenders.

deedubaya 12y ago
It would be interesting to know what the small loans are actually being used for. Are they being spent on healthcare bills? Clothes for their children? Or are they being used to pay off another bad debt like a credit card?
- tdees40 12y ago
  Equally interesting is that they tend to pay them back by hitting up their relatives for cash (which would have probably been a better idea in the first place!). http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-payday-loans/ http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-...