
Expensive Loans to Desperate People Built the $90B Payday Loan Industry - pseudolus
https://www.bloomberg.com/news/articles/2019-02-14/expensive-loans-to-desperate-people-built-this-90-billion-industry
======
hprotagonist
"Usury" is a word that's gone out of fashion, but sometimes I wonder why,
because this is clearly it. "Loan to the desperate poor in a way calculated to
fuck them over for ever" is _explicitly bad_ , and that we've had to keep
yelling this out loud over and over for near as I can tell the entire duration
of written history is not a heartening fact.

~~~
Rainymood
Just playing the Devil's advocate here, why is this bad if profit and growth
is the ultimate motive?

~~~
hprotagonist
pragmatically: if you sow the wind it’s only a matter of time before you reap
the whirlwind. It’s counterproductive if sustainability of growth is your aim.
Predatory behavior will, eventually, blow up in your face. If individual
companies do this eventually someone will step on their necks. If nation
states do this at scale, eventually the people won’t take it any more.

morally: because it is bad for profit and growth to be the ultimate motive
just as soon as it requires you to treat people as things. The economy is a
fine servant and a terrible master.

~~~
gowld
This is wishful thinking. Predatory lending is bad for consumers, not for
businesses.

~~~
NeedMoreTea
Until the default rate of bad loans turns into a banking crisis.

------
diafygi
Since this is HN, I'd like to emphasize that this industry is not just in
strip malls. It's very prominent in apps and websites now, too. Many VCs fund
"short term" loan apps who's bread and butter are repeat customers (e.g. poor
people caught in the high interest loan cycle of death).

I don't theoretically have a problem with short term loans for one-off
emergencies, but if you're living paycheck to paycheck, emergencies happen all
the time and it's incredibly easy to get sucked into a downward spiral and
become a "repeat customer". So, I can't see how private industry can
fundamentaly solve the short term loan problem, because they will always want
repeat customers.

Anyway, just because the photo in the article is a street corner payday
lender, please don't think this leeching industry isn't in the virtual world
as well.

------
exabrial
* Payday lenders charge fees that automatically incur interest. There's usually a fixed application fee, and there's a penalty for paying off early. Both of these are designed to reduce the amount going out the door while increasing the principal.

* Selling their debt is quite profitable for payday lenders, so they are incentivized to make bad loans.

* Logically you can't pay a payday loan back of you're living paycheck to paycheck.

* Payday lenders nearly universally skip around federal and state regulations by incorporating in Indian tribal areas

Most people do payday lenders and installment lenders together. While there
are bad players in every market, the competition/state/federal oversight in
the installment space makes it a much better behaved industry.

~~~
kamarg
> * Selling their debt is quite profitable for payday lenders, so they are
> incentivized to make bad loans.

Debt collectors know that they probably can't collect most of the paper they
buy. This is especially true for non-exclusive paper and so they buy it for
pennies on the dollar. Bad loans are one of the major losses (after employee
expense and legal fees) for most payday lenders.

> * Payday lenders nearly universally skip around federal and state
> regulations by incorporating in Indian tribal areas

The Scott Tucker case shows the courts have decided not to allow the rent-a-
tribe defense unless the tribe truly owns/operates the company. Having them
get 1% of the profits and a couple call center style jobs isn't enough to make
a payday lender be considered a tribal company anymore.

Source: Wrote the lending software for payday lenders.

Edit: To be clear, pennies on the dollar tends to mean less than $0.10/dollar
average for debt purchasers. The loan company is losing over 90% of the
principal they loaned out and are obviously not collecting the additional
interest/fees that make these types of loans so expensive to pay back.

------
Bucephalus355
Tim Geithner was Obama’s treasury secretary.

Are you curious what he does for a living now?

He is President of a payday loan company.

Hope you’re proud of yourself Tim.

[https://www.cbsnews.com/news/private-equity-firms-are-the-
ne...](https://www.cbsnews.com/news/private-equity-firms-are-the-new-
predatory-lenders-report/)

~~~
maxxxxx
That guy also played a terrible role during the bailouts of 2008. We would
have been much better off with a treasury secretary with some backbone instead
of a pushover like Geithner whose only concern was to keep Wall Street happy.

~~~
gowld
What was wrong with Geithner's response in 2008?

wikipedia.org/wiki/Timothy_Geithner

tells a pretty positive story, with a mixed bag of wins and failures.

~~~
maxxxxx
They bailed out AIG creditors fully, a lot of bank execs got to keep big
bonuses for blowing up the financial system. Almost nobody got prosecuted.
They went way too easy on the banks.

The bailouts should have been a payday loan with punishing interest rates.
Instead the bailouts showed that all the talk about creative destruction and
free markets where the strong survive applies only to the little guy who loses
his job or home . As soon as the big guys feel the pain the rules get changed
quickly.

------
whatok
How much would you be willing to loan to someone who had no income
verification and no assets to pledge? What would you charge?

~~~
minikites
I don't see how this is a useful question, I don't have millions of dollars at
my disposal.

~~~
whatok
Having millions of dollars at your disposal has nothing to do with my
question. These businesses exist because there's a demand for them that is
being unmet by traditional banking. I don't disagree that it's an unsavory
business and fully support anyone perpetuating fraud going to jail.

That said, higher risks require higher returns or the alternative is the risk
is simply not taken.

------
josephby
Payday Loan business. #savedyouaclick

~~~
dwighttk
Expensive Loans to Desperate People Built The $90 Billion Payday Loan Business

Would be a nice way to fix the headline.

------
oconnor663
> 80 percent of payday loans are taken out within two weeks of a previous
> payday loan

That statistic sounds misleading. Suppose you have one guy who takes out a
payday loan every two weeks (in a cycle of debt, causing more harm than good),
and six guys who take out a payday loan once a year (helping with emergencies,
causing more good than harm). In that scenario, two things are simultaneously
true:

\- 80% of loans cause more harm than good.

\- For 6/7 people, the loans cause more good than harm.

Of course the story is more complex than that. It could be that the harm to
the one guy is much larger than the benefit to the other guys. But anyway
looking only at the 80% number is missing a lot of the story.

------
jermaustin1
I had contemplated doing a slightly more ethical version of short, small-
dollar loans (10 weeks and max $500). I initially wanted to do it for a small
5% fee, and it paid out over 10 payments, with no additional fees or anything
like that. But I couldn't make the numbers work with any amount of default
rate.

Also the statistics on default for the payday loan industry are muddy at best
(its claimed to be around 6%). But, victims tend to pull out one loan to pay
back another instead of "defaulting", or paying the fee/interest portion of
the loan every week to keep out of default.

------
shusson
> Expensive Loans to Desperate People

Sounds like loan sharks to me.

------
dwighttk
Just to play devils advocate (because I'd truly love it if companies didn't do
this, and people didn't think they needed them)

1\. What would sensible regulations look like in this sector?

2\. There are people who choose to not get bank accounts and do their banking
at payday loan stores despite the obvious costs. If regulation drives costs up
or companies out of business where would these people go?

~~~
elliekelly
> 2\. There are people who choose to not get bank accounts and do their
> banking at payday loan stores despite the obvious costs.

Most of these people are not unbanked by choice. They can't afford a bank
account. It sounds crazy to most of us because our bank accounts are "free"
but they often have stipulations attached: minimum balances, direct deposit, x
number of transactions per month. And don't forget how quickly overdraft
charges can add up. People who are making minimum wage and living paycheck to
paycheck simply can't afford all of the costs that come with having a bank
account because it's actually cheaper for them to use a payday lender than to
pay $75 in overdraft fees at the end of every month.

~~~
dwighttk
While true, there are people who chose to not use banks.

Also, there are banks without all that. Maybe it’s impossible to get now
(because I started with ING) but my checking and savings with Capital One have
no minimums, no direct deposit required, & no transaction requirements. They
both actually pay interest (not much on the checking). (As far as overdrafts
go they offer what amounts to a low max credit card to back the account where
the interest rate is the only penalty, i.e. no fees) On the other hand, I’m
sure that last one isn’t great with bad credit, and perhaps the accounts were
only available to me because my credit.

~~~
elliekelly
> On the other hand, I’m sure that last one isn’t great with bad credit, and
> perhaps the accounts were only available to me because my credit.

Not only would an underprivileged person never have access to an overdraft
line of credit as you do, they very likely wouldn't even be permitted to open
the account.

Most people don't know that you actually have to be approved for a bank
account. Most banks won't permit you to open an account until they've run
what's called a "Bank History Report" on you. It's similar to a credit report
but focused on your banking habits. For most people it's just a formality, for
underprivileged people, it's serves as a complete bar to their ability to
access our financial services system.

------
wazoox
Usury is simply forbidden in civilised parts of the world. Just sayin'...

------
qubex
I'm an economist and a mathematician by training, dual citizen of Italy and
the United Kingdom. Despite my penchant for mathematics I went into the family
business (a medium-sized chemical manufacturing firm).

That preamble is necessary as my comments on this must be taken in context
with my viewpoint on things.

I am constantly horrified by the sheer brutality and unfairness of thinly
regulated capitalism in the era of globalisation. Multinational corporate
capitalism truly is showing itself to be a force that, in an anti-Robin Hood
fashion, takes from the poor to give to the few. Offshoring of labour has
gutted the middle classes and forced the lower classes to compete with foreign
populations that, starting from a much lower base, are hopelessly competitive.
All that is left is service sector jobs and an impossibly high bar to cross
into intellectual-work echelons.

I used to be very much in favour of globalisation but I am finding that my
enthusiasm was very much misplaced. These people are reduced to debt slaves.

------
Horseshoe
Credit unions often have alternatives to expensive payday loans. My CU, for
example, offers a "Better Choice" loan of $500, payable in three monthly
installments with interest in the range of a typical credit card. They will
run a credit check and ask you to fill out a monthly budget form, but if
you've been a member in fairly good standing (not routinely bouncing checks,
etc.) for some time, the loan will usually be approved. It also gets reported
to the credit agencies to help improve your score.

------
squozzer
As someone who worked at a pawn shop, I can tell you it's not so much that the
interest rates are high, but that the loans are small, and costs to the lender
are fixed at a certain point.

Some of it also is to encourage quick payback, generally the longer a high-
interest runs, the more likely it will be defaulted.

Plus, many borrowers have credit / banking problems and/or their loans are too
small for other lenders.

That said, it seems a field ripe for "disruption" \- crowdfunding - maybe
called crowdlending / crowdgranting?

------
osrec
The title could accurately be applied to a very large swathe of the entire
finance industry.

~~~
dwighttk
except the "$90 Billion" part

~~~
osrec
Yeah, it's a few orders of magnitude too small.

------
gowld
Mods, please fix title. What is "this" industry?

------
Simulacra
Unfortunately I do not believe there is any law that you could pass that would
stand up to judicial scrutiny that would ever solve this problem. Desperation
has a way of overcoming all logic and reason.

That said.. you could always tax the snot out of them. If the lender had to
pay a 55% tax on any money they loan out... but that would probably kill all
sorts of other good loan markets, like cars and retail.

~~~
arethuza
Interesting, because for a lot of history laws against usury were actually
pretty common:

[https://en.wikipedia.org/wiki/Usury](https://en.wikipedia.org/wiki/Usury)

~~~
Simulacra
I don't disagree, but I'm sitting here trying to think through the legal
arguments for and against, and it seems like it would stand under contract
law. One person is loaning another person money. So long as both understand
the details of the contract, it's legal. Which brings me back to my earlier
comment that even if the lender was required to show just how truly awful the
loan was to the borrower, desperation will still overcome all logic and
reason. Which then brings in the thorny issue of what is government's role in
this, to protect the consumer, or to protect the consumer from their own fully
informed yet bad decisions?

~~~
ticviking
The strongest argument against Usury is that it creates an unlimited claim on
the future labor of the borrower making it into a kind of forced servitude. We
rightly don't allow people to sell themselves into slavery, why then do we
permit this kind of unlimited liability?

~~~
leetcrew
> The strongest argument against Usury is that it creates an unlimited claim
> on the future labor of the borrower making it into a kind of forced
> servitude.

payday loans are a pretty distasteful business but you are exaggerating quite
a bit. unsecured personal loans like this are almost always dischargeable in
bankruptcy, unless the judge can be convinced that the borrower never intended
to pay them back.

~~~
ticviking
Bankruptcy is how we sever that claim, and requires a legal process. If we as
a society didn't have a bankruptcy process what would the consequence of this
kind of lending be?

~~~
leetcrew
obviously society would be a lot more oppressive to debtors if bankruptcy
didn't exist.

maybe I interpreted your use of "claim" more strongly than you intended, but I
am mainly replying to the sentiment in this thread that payday loans create an
unbreakable cycle of enslavement / indentured servitude. they are abusive
loans for sure, but they're not _that_ bad. if you already have no assets and
terrible credit, you don't have much to lose by filing for chapter 7 and it
will be pretty difficult for the lender to avoid having the debt discharged.

~~~
ticviking
Totally fair, I was also thinking of this kind of claim in "An-capistan"
without a state enforcing bankruptcy as an option. The imagined regulatory
environment is critical to how we think about his kind of thing.

I do think you underestimate how accessible bankruptcy is for most people who
are served by payday lenders.The folks I know who are forced into that market
aren't well educated, and may not even know where to begin. I find that they
view bankruptcy as a way "fat cats like Trump get out of the debts while
working stiffs have to pay"

As a tool it's really only available to middle and upper-middle class
Americans.

