Here is a piece I wrote for a local Blog here in Cleveland about Pay Day Loans...

[WCGreen]

Hardship, Loans & Ripoffs
Looking back at what credit used to be (and what it is now)



Back when I was a kid, when my dad ran short of money, he had three options available to get his hands on some ready cash. First, tap a relative. Second, get in touch with a guy who knew a guy (you know what I mean).

The third option, which is now fashionable again at your local Check into Cash joint, was writing a post-dated check to the owner of a family storefront business.

Unbelievable as it may seem, there were a whole mess of stores, small businesses really, lining the main streets of any city.

http://www.coolcleveland.com/blog/

[d_r]

1. I agree with you, BUT

sometimes a person finds that they need some money for something. If your old car breaks down and you are going to lose your job because you can't get there, better to get that pay day loan and get your car running. It might be better to get that check advance than to get your power cut off and have to pay to reconnect it. It should be a last resort, but it can be a needed thing. Not everybody has the credit rating to get a better rate. And some folks living pay check to pay check - with small paychecks to begin with - can get really messed up when one of those little "emergencies" comes along.

The really bad thing is when they get people on a rotating basis. Somebody needs some cash for one of those "emergencies" and they borrow $300 for two weeks for $30 bucks. Two weeks later, they get paid but then they still need that money, so they re-write the check for another $30 bucks. Two weeks later they re-write the check for another $30 bucks. They never catch up with themselves.

Yeah, it is a racket. It is a rip off. But sometimes it's the best shot a person has.

[WCGreen]

2. I know that it is the loan of last course for a lot of people...

But there is no reason they should charge 600% interest or whatever the state deems is "okay"...

[GreenStormCloud]

4. Processing and paperwork fees.

It takes the same amount of paperwork, and the same time spent by employees to loan $300 as it does to loan $3,000. That expense has to be recovered. Small loans are always expensive because the overhead has to be spread over a smaller amount. The person borrowing has the option to call around to different places to try to get a better rate.

[EdMaven]

9. do $3000 loans go at 600%? nah, it's a racket. the "spread" as you say is not over

$300, but over thousands & millions of $300 loans, i.e. over millions of dollars.

those places are making bank & are often owned by banks if you follow the paper trail.

[GreenStormCloud]

10. You have the same problem with small loans that you do with small scale manufacturing.

Order a small quanity of X and the price will be higher per unit than for a larger quanity. The big expense is in the first item. The machinery has to be set up for the first one, after that it is just keeping the machinery operating. And the cost of the first unit can be spread over a larger number of units. Same with a loan. Much of the cost of a loan is for the first dollar. The cost of paperwork and preparing one tiny loan is the same as the cost of one moderately larger loan. So the cost of the loan is spread out over more dollars and the interest rate can be lower for the larger loan.

Further, small loans are higher risk loans. The people don't have good credit or they would have credit cards and would not need a $300 pay-day loan. That's just a fact of life.

If you put a cap on the interest rates so that small loans are at the same rate as larger loans then the small loans won't be made because there won't be a profit in them. You will close off the only source of credit that many poor people have. The problem with many good intentioned laws is that they often turn out to not work as advertised.

Yes, that credit can be a trap, but so can any credit if not properly used.

Such loans service are indeed often owned by banks but are more often owned by insurance companies.

[EdMaven]

12. No, you don't. Completely different organization.

Small scale manufacturing = many small shops making a comparatively small number of items in independent facilities. Bascially mom & pop.

Payday loans = national chains making millions of loans through locations throughout the country. Basically walmart for loans.

[GreenStormCloud]

13. You don't understand economies of scale.

Item #1 is expensive. Items 2 to 1 million are cheaper because everything was set up on item #1.

With any loan, each loan is a separate item. All the paperwork and processing has to be done again for each loan.

If you think it can be done cheaper, then start your own pay-day loan business. Drive the expensive ones out of business as the poor people come to you because your rates are cheaper. You will help poor people and capture all the market share and get very rich at the same time.

[hfojvt]

5. they are bound to get people on a rotating basis though

You said it yourself, the customers are living paycheck to paycheck. Thus, whenever they take out a payday loan, on their next or 2nd, paycheck, they have to live on their paycheck minus the loan amount minus the fee. Ergo, they will never make it to the 3rd paycheck without another payday loan, which puts them in another bind for the 3rd paycheck.

I don't think it is ever the best shot a person has. Everybody should learn how to save. To cut expenses until they have built up a decent sized savings account, and even then to immediately put $10 or 2% of their paycheck, whichever is bigger, into their savings whenever they get paid.

[WCGreen]

6. But if you get into it just once, you can be stuck on that treadmill

for a very long time...

[d_r]

8. I know you are right

[WCGreen]

7. Like I state in the end...

But if you need money and have no other place to go? It’s easy for me to criticize this practice because I have fairly good credit. But not everyone does.

So it really isn’t fair for me to judge what people do when they are in such dire straits. But for Christ sake, do these proprietors really have to charge such onerous fees just so someone can get through a stretch of bad luck?

[GreenStormCloud]

11. Yes, they do.

See my post above on the cost of small dollar loans. You still have to pay the clerk who prepares the paperwork the same amount for their time and effort, even if the loan is just for $100.

Those places are in competition with each other. If one of them had a magical way of cutting their costs in half they could charge less and get all the business away from the others. That one place would make tons of money and the others would go broke.

So if you can figure out a way to do small loans more efficiently that the current pay-day loans services then there is a golden path for you to help poor people get credit and make a vast fortune for yourself at the same time.

[CaliforniaPeggy]

3. I've always wondered how those places worked...

Thanks for this fascinating look into that world.