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ZestCash is Not Good. (jasonfager.com)
243 points by jfager on Oct 14, 2010 | hide | past | web | favorite | 136 comments

I'm really sorry that Prosper didn't prosper, because I thought that P2P lending would be an excellent alternative to payday loans. It made huge sense to me that if one person in a community has money and one person in a community needs money, then if they trust each other, one guy pays a modest APR and everyone walks away happy.

As it turns out, Prosper couldn't beat the payday loan companies because the people who need payday loans are atrocious credit risks and they collectively relieved us lenders of hundreds of millions (cough, not a typo) before we wised up about this.

Incidentally, if someone wants to brave formidable regulatory barriers, beat Paypalian levels of fraud, and spend their days dealing with the problems of the underclass, this is a multibillion dollar opportunity and you'd create more wealth for the poor than anyone since Walton.

Lending Club? (I've invested in both Prosper and Lending Club)

The problem is with payday loans, that one party can not really be trusted. This is one of the reason the rates are so high, so many people default. People who can not manage their money are not the best of people to lend to.

People who can not manage their money...

I realize that this is sort of a personal nitpick and that it does nothing to invalidate your central claim, but when you make minimum wage and your car breaks down there's not really any money to manage. The thing about living paycheck to paycheck is that unexpected expenses are insuperable (by definition).

As far as I know, most people who live paycheck-to-paycheck are not in that situation because they have simply not yet succeeded in their repeated, rational and wholehearted attempts to improve their situation. Most are there because they don't know how to get and hold onto money.

Prosper is still prospering, and some of us who are more choosy about our loans are still investing.

Prosper's certainly not making any money itself. What happens when Prosper is out of business? You should try LendingClub instead-they're finally moving toward profitability, and most lenders at LendingClub actually make money on their loans.

LendingClub is hardly flawless, for example verification of potential borrowers' income as presented to lenders is voluntary for borrowers, but the platform allows lenders to question potential borrowers and pressure them to verify income.

From details on ZestCash's website, there are four fairly substantial ways in which they are different than payday loans, which the original author seemed to dismiss.

First, ZestCash is charging a substantially lower APR than payday loan shops (280% versus 480%).

Second, ZestCash allows partial repayment. This is critical, as requiring full repayment is a major factor in forcing payday loan customers to rollover their loans, incurring additional fees and leading to additional loans. Partial repayment is far more likely to result in a customer who can actually pay off their loan and is not trapped in a cycle of debt.

Third, ZestCash further increases the chances of repayment by allowing flexibility in both amount and length of the loan.

Fourth, as the Center for Responsible lending points out, most payday loan employees are minimum wage and not trained to help customers in any way. Anyone approved at ZestCash gets a personal representative who will work with the customer 1-on-1 for the life of the loan.

Time will tell whether the ZestCash team is able to generate positive change for the underbanked -- full disclosure, I've worked with Douglas and think he's very sharp -- but I certainly think their story is a lot more balanced than the original article would suggest.

I do dismiss those.

First, ZestCash is charging a substantially lower APR than payday loan shops (280% versus 480%).

You're cherry picking one of their lowest rates and putting it against the assumption that someone's going to roll a payday loan 7 times. If you actually click through and read the CRL report they're quoting, you'll notice that they're misusing the statistics. ZestCash claims that the CRL reports that 80% of payday loans are rollovers, but when you click on that link, the CRL page you're taken to doesn't give that statistic anywhere. I've only skimmed the full report, but I haven't been able to find where they're getting that number from. I'm left highly dubious of the claim that the average payday loan is rolled over 7 times, though, given that the report does explicitly state that the average number of transactions per borrower who takes out more than one payday loan per year is only 9 (and 20% of people who take out payday loans only take out 1 per year, and aren't counted in that group).

Second, ZestCash allows partial repayment. This is critical, as requiring full repayment is a major factor in forcing payday loan customers to rollover their loans, incurring additional fees and leading to additional loans. Partial repayment is far more likely to result in a customer who can actually pay off their loan and is not trapped in a cycle of debt.

But they also require a minimum of a two month term, and I can't find any indication on the site that they let you pay off the loan early to avoid additional interest accrual.

Third, ZestCash further increases the chances of repayment by allowing flexibility in both amount and length of the loan.

That's what they claim. Hard to state it as fact just yet. And if the chances of repayment are increasing, shouldn't the APR be going down? The justification for such high rates is supposedly that these are such high-risk loans.

Anyone approved at ZestCash gets a personal representative who will work with the customer 1-on-1 for the life of the loan

A part of what makes me so mad about this site is that they're posturing themselves as a caring, responsible alternative that's going to hold your hand through this process. If you care and are responsible, you're not going to charge such usurious rates. Period.

> If you care and are responsible, you're not going to charge such usurious rates. Period.

So you'd prefer that economically viable rates are only offered by people who are irresponsible and/or uncaring.

I fail to see how that would be an improvement.

So you'd prefer that economically viable rates are only offered by people who are irresponsible and/or uncaring.

No. I'm saying that only irresponsible and/or uncaring people offer those rates, that the act of charging those rates demonstrates you to be irresponsible or uncaring.

> But they also require a minimum of a two month term, and I can't find any indication on the site that they let you pay off the loan early to avoid additional interest accrual.

This is the most damning part, IMO. I can understand the necessity of high fees to cover risk, but when someone has the ability to pay a loan back and you refuse to take their money so that you can get more interest, that's pretty shady.

The only other time I've heard of conditions like that are for some car loans, where they give you a better price on the car and then try to make the money back with a higher-interest loan. Then they want to prevent early payback to ensure their profit margins.

As mattmcknight points out elsewhere, I did miss a sentence that indicates they will accept early repayment. The 30% origination fee on every loan is still significantly higher than most payday loan places, though (it's usually something more like 15%).

> ...ZestCash’s own rates, which run between 242% and 462% APR (not a typo)...

Yeah, and a 5% APR on a 30 year mortgage would look ridiculously large if you quoted it as an MPR (Millenium Percentage Rate).

The only utility of using a standard such as the APR is to compare loans with the same term. Quoting a one week, single payment period loan in terms of an APR leads readers to compare its magnitude with that of other much longer term loans; this is a wholly disingenuous attempt to appeal to emotion over basic mathematical reasoning.

Basic mathematical reasoning actually pushes in the opposite direction: that one should generally prefer to maximize long-run return (or minimize long-run interest payments), so the lengths are only relevant insofar as they change the risk. That does change things, but doesn't make them completely incomparable, and APR is as good a standard measure as any.

If you look at most "normal" debt markets, debts of quite different terms compare on reasonably similar APR scales: a 1-month piece of corporate paper and a 30-year government bond all fall within a few percentage points APR spread. It's not like nobody's ever thought of the idea of an APR curve before!

OK, so work the other way. What's the MPR (Monthly Percentage Rate)? If I'm using their lowest rate option and borrowing $250 for 6 months, I get an MPR of about 20% If I count the origination fee of $75, I get just under 25%. In contrast, my moderately high credit card which also lets me take short-term loans charges about 1.5% MPR. Is ZestCash really worth 13 times more? Are they taking on 13 times the risk?

You can play with the terms as much as you like. ZestCash is a rip-off compared to any other option.

Nobody anywhere speaks about MPR, though, and if people did, we'd be used to the typical MPR ranges that a reasonable loan actually falls into. A 462% APR isn't staggering because it's "462" in isolation, it's because it's 462 compared with numbers like 30 (credit card) and 5 (mortgages).

ZestCash loans are marketed and scheduled for 2 month to 6 month terms, and that APR percentage includes a 30% origination fee that's about double the typically origination fee of most payday loan companies.

APR is pretty irrelevant for payday loans. If my math is correct, even at the highest quoted 462% APR, a £100 loan for 10-days would have a fee of ~£5. Compared to ~£16 for the rest of the payday industry, that's not too bad.

In reality they're an awful source of funds if you've got other options, but that's the point, they're for people who can't get a traditional loan, and whom are most likely high-risk.

It's not that simple. For people with no income, there is no ethical way to price a loan; the loan is going to blow up. Meanwhile, for people who do have incomes, there usually are better options than payday loans (credit union loans being an example). The problem is that they don't offer the convenience that a payday loan does; you can't walk into a credit union on a Thursday night at 11PM and get a loan.

Even 1 day paper uses annual rates.


When your cost of money is 30000 basis points, it just means that you're shifting default risk from the landlord/doctor/drug dealer to a speculator, aka "loanshark". That's why it's not so predatory as it seems. Would you rather people shaft the dentist or some asshole?

I work in the (junk) bond markets. There's a clear distinction between Yield-to-Call paper (which is priced so that different bonds are priced based on the yields they offer) and paper that trades on a 'price basis' (i.e. recovery rates in default are a very major consideration).

For the 'price based' bonds, the APR (or IRR) is a nonsense measure : because it is only considering the best outcome (payback at maturity). Most people don't understand that the high IRRs exist partly because people are bundling the price-effect of the downside case into the single 'yield' number of the best case.

I don't want to defend payday loans really - just point out that Treasury Bonds and (say) Lehman bonds are two very different animals.

They offer a minimum loan term of 2 months, and I can't find anything saying you're allowed to pay it off early to avoid additional interest accrual.

Early in my marriage, when I had a couple kids and 2 student loans to pay, I was having trouble stretching between pay-checks and used payday loans several times. They are a nightmare, because you are stealing from next month and you have nothing to show for the money spent on fees. It's a black hole when you have limited resources. Saying that, banks are as bad or worse with their $20-$30 per transaction 'convenience' overdraft fees, which, if you lose track, can pile up on one and two dollar debit card purchase.

I don't know if I'd go so far to say they don't exist, but I do have a lot of sympathy for the borrowers.

> The Center for Responsible Lending, which is frequently mentioned on ZestCash’s website at the time of this writing, supports a 36% annual interest rate cap.

I used to think this way until I met a guy who was doing research into opening a payday loan shop. Taking a bit of risk and being blunt, I said to him, "Hey dude, you know, I like finance. I get finance, it's good. I'm not a person who just bashes finance because I'm ignorant... but c'mon, aren't payday loans, like, totally fucking evil?"

He took it in a good spirit and answered. Here's his take:

The first thing he said is that payday loan shops don't charge a huge APR, they charge a flat fee for getting a payday loan, often $20 or $40 on a $500 loan.

That's 5% to 10% of the loan amount, however, if you average that to APR you get a crazy %, something in the low thousands, like 1000% or so.

So I said, "Well, dude, yeah, 1000% is evil. Right?"

He says, and I'll never forget this, "What do you think the default rate is on a payday loan?"

I said, "Well, jeez, I dunno..."

He said, "Okay. It's really high. Many of them don't get paid back. And it's a shitty business to be in, nobody likes selling payday loans. The price of a payday loan is what it is considering the default rate and the unenjoyableness of the business. If someone found a better system or enjoyed it, they could get in with lower rates. Traditionally banks don't want anything to do with it, since it's such a high risk and unpleasant business."

I said, "But... isn't that taking advantage of people?"

I won't forget his second quote either - "People only go get a payday loan when, for whatever reason, they can't get money anywhere else. If payday loan places didn't exist, there'd be no emergency credit for people. Mind you, these are the worst borrowers. These are people with no savings who no one trusts enough to lend them 500 bucks for two weeks. Do people abuse it to go drinking a week early? Yeah, sure, like anything else. People abuse eating fast food, drinking too much, tobacco, all sorts of things. I don't approve of that. But for other people, a payday loan is a lifeline. If you regulate it so you can only charge $5 for a $500 loan, there won't be payday loan shops any more. They won't exist. And that'll be bad for people who desperately need credit and can't get it elsewhere. The people that complain about this aren't doing anything to help people, they're not opening a shop to compete with more fair rates, because they'd go out of business. They just like to talk about how unfair it is, but haven't thought about what to do after they drive all these shops out of business with their regulation."

He explained some valid reasons for people to get a payday loan - car breaks down and they need to replace it, emergency expenses... he said under those conditions, it can make sense to get a payday loan. And with the huge default rates, the payday shops need to charge a large amount to stay in business. Later he went on to say that people really like making money by lending, so if they thought they could beat a CD or bond rate by lending for low amounts at payday shops, they would. The reason it doesn't happen is because of the default rate and how unpleasant the business is. (No prestige, in fact it's anti-prestigious, and not fun working conditions either)

Changed my view on the industry. Still don't like the business, would never go near it personally. But it puts it into context some.

Payday loans probably are superior to some I-can't-believe-it-isn't-credit options in terms of APR: for example, if you're about to miss a utility payment, get the power turned off, and get hit with a $50 fee for getting it turned back on again N days later, then a payday loan strictly dominates the implicit APR of getting credit extended by your utility company and the lights stay on and you suffer no social embarrassment. You could come up with similar examples for automobile breakdowns (best alternative to getting a loan: losing your job), bouncing rent checks, paying overdraft fees at a real financial institution, etc etc.

I still would go back to cleaning oil pipes with a toothbrush prior to working for them, though, regardless of how much money they were prepared to throw at me. Like Thomas mentions below, they are a loathsome industry.

I strongly believe there is an opportunity here: just like FICO and credit cards made short-term loans effectively free for much of the middle class or like how competition and technology has brought the price of remittances to Mexico to below the cost of a Big Mac, I think there is some combination of technology and innovative products which should bring the cost of short-term loans down by more than an order of magnitude for the poor. Maybe it resembles a credit union account. Maybe it is something weird, like cell phone companies moving further into the consumer credit space. (It might not be obvious, but cell phone contracts are economically equivalent to an extension of credit, and they're made to work profitably among populations that no sane financial institution would touch.) But we can do this better.

You cleaned oil pipes with a toothbrush?

Yeah, when I was a high school student, to save up money for college I got a job under the table from my sister's friend's father. His business was in processing scrap components (everything from buttons for factory machines to the aforementioned oil pipes) and reselling them. This involved a lot of manual labor sorting e.g. a pile of 10,000 switches into functioning and broken ones, then sorting by color, or in cleaning oil pipes using a toothbrush and some solvent (motor oil, as I recall).

I learned an important lesson from that job: when someone tells you he doesn't want to have you on the books because of "OSHA and the IRS and all that rot", that is a leading indicator you can use for "not someone you want to work for" prior to getting a 20 lb oil pipe thrown at your head close enough to move your hair.

I thought running cable through plenum ducts was a crappy job. You win.

On a more serious note: gangsters used to give free turkeys away to the neighborhoods. Just managing to be of some use to somebody sometime doesn't make one less of a predator.

I think crappy jobs correlate with awesome people. Lots of successful people I know washed dishes, cleaned pipes, did construction, or something equally "blue-collar." It builds character and makes you yearn for a better life.

How many people you don't know washed dishes or cleaned pipes all their life and never went beyond that, though?

Billions? What does that have to do with anything?

It suggests that the awesome people with backgrounds in crappy jobs got out of the crappy jobs because they're awesome, rather than being awesome because they did crappy jobs.

If you only look at the set of people who work in white collar jobs, I would wager those who previously had blue-collar jobs exhibit some positive characteristics.

I don't think that the set of all people who have had or currently have a blue-collar job is particularly relevant to the argument, other than as a backdrop for speculation.

Correlation is not causation. You could just as easily interpret his statement as P(CJ|A) > P(CJ|~A): the conditional probability that someone had a crappy job at some point in their life given that they're awesome is higher than the conditional probability they did given that they aren't.

It rather destroys the supposed correlation between crappy jobs and awesome people.

No, it doesn't. Correlation is not causation. If awesome people have worked crappy jobs more often than not, there can still be a positive correlation between the two variables even if there are dramatically fewer awesome people than people who have worked crappy jobs.

Yes, it does. Crappy jobs won't be correlated with awesome people -- which was andrewljohnson's original claim -- to any meaningful degree given the billions of unawesome people. Since correlation is symmetric, awesome people will not be meaningfully correlated with crappy jobs, either.

Plot every person in the world on a two dimension grid. Dimension x is awesomeness, dimension y is crappiness of crappiest job. Vast majority of people will be clustered around top left of graph (unawesome people with crappy jobs). But if the mean y value fluctuates upwards as you move to the right along x, then there's a positive correlation, regardless of whether or not there are significantly fewer data points further to the right. Read the "Correlation and linearity" section of the Wikipedia article:


A better question would be "How many awesome people.."

Just asking how many people doesn't disprove anything.

Mike Rowe (Dirty Jobs) is trying to dispel the myth that hard work is bad and desk jobs are good. He gave a great talk at TED, available here: http://www.ted.com/talks/mike_rowe_celebrates_dirty_jobs.htm...

> cell phone contracts are economically equivalent to an extension of credit

Except isn't the big way that cell phones are expanding into the poorer marketplace is through prepaid cell phones like Boost Mobile?

I'm moderately skeptical that the price of payday loans is far from the cost of making them, though willing to be convinced otherwise, and I agree with you about my likelihood of participating in that industry.

Yes, but "Have this $500 phone, don't worry, we know you're good for it because we will end your social life if you aren't" still happens with people who couldn't get $500 cash from a bank to save their lives.

The first thing he said is that payday loan shops don't charge a huge APR, they charge a flat fee for getting a payday loan, often $20 or $40 on a $500 loan.

That's 5% to 10% of the loan amount, however, if you average that to APR you get a crazy %, something in the low thousands, like 1000% or so.

In the case of ZestCash, they offer a minimum 2 month loan term. Their fee on $500 in that period isn't $40, it's $219.12, and I can't find any indication on their site that you can pay it off early to avoid accruing additional interest. It's similar to a credit card that forces you to only make minimal payments.

Edit: I also don't think enough attention is being paid to the two other major points I tried to make in the post, that ZestCash is using some shady tactics to try to convince the unsavvy consumer that they're getting a much better deal than they really are, and that all of the coverage from major blogs was surprisingly positive given such a controversial space, and that none of it mentioned ZestCash's actual rates despite implying that their model represented a significant improvement over payday loans.

Slightly unclear on two counts. The site says, "We will never penalize you for paying your loan off early. By all means, be our guest!" https://www.zestcash.com/how-it-works/zestcash-loan-fees

The origination fee is 30%, $150. It seems a little high, but if you end up extending the term, it lowers the impact of the interest rate.

What you seem to be missing in your analysis is that payday loans are typically a 14 day term, whereas these can be stretched out to 6 months, which gives people a more reasonable chance of paying it back without having to roll it over and incur new fees. In a typical payday loan scenario, you'd be paying the origination fees every two weeks...

Thanks, I missed the sentence about early payments when going through the site before.

In a typical payday loan scenario, you'd be paying the origination fees every two weeks

Saying that ZestCash is significantly better in this regard assumes that a person taking out multiple payday loans in a given year isn't going to be taking out multiple ZestCash loans in a year. While there are certainly some reasons to guess that might be true, there's simply no way to make that claim for certain. You've already shown that you're better at going through the site than I am: do you see anything saying ZestCash won't let someone take a second loan while they're repaying a first?

I should also point out that my arguments aren't centered around the idea that ZestCash's model is worse than or just as bad as payday loans. You can be better than a payday loan and still be Not Good. And what's actually making me angry is how ZestCash is marketing itself. As another example: on the "A Word From our Founder", Merrill descibes payday loans as bad because "they are very expensive, charging more than 400% interest in some cases." - completely ignoring the fact that ZestCash charges more than 400% interest itself.

I too, have had discussions with people who run pawn shops. The customers (who pawn objects to borrow money) are notoriously unreliable, bad credit risks. The banks/credit unions/credit card companies won't touch them. If they need money fast, they pawn something, and often don't return to pay the money back. The guy I have spoken with (who owns the pawn shop and is a tenant) is not a nice guy. In fact I find him a bit creepy. But he is a legitimate businessman providing a service for his customers, who, mostly, are happy with what they get for their money.

The point I'd like to add to the above post, is that this business is going to exist in some shape or form anyway. By allowing pawn shops/payday loans to exist as legal businesses, at least the proprietors operate (generally) within the law, in plain view, and pay taxes.

If you outlawed payday loans or brought in some type of regulations or maximum interest rate, the legitimate businesses would close. The lending would still take place, but instead of colorful shops on street corners, it would be taking place in back alleys. The lending conditions for the customers would get worse, and the penalties for not paying would extend past penalty fees and seized TVs and enter the leg-breaking scenario. It makes no sense at all to try and regulate the profits of payday loans and pawn shops.

"It makes no sense at all to try and regulate the profits of payday loans and pawn shops."

I agreed with you up to that point. Regulating them IS the point of allowing them, as long as the laws aren't draconian this will stop the bulk of these types of arrangements happening on the black market.

I'm all for regulating the businesses - who can own them, the sorts of contracts they can write, where they can operate, just like any other business.

I said I'm against regulating the profits - in other words, let them set their own charges and interest rates.

Pawn shop owners don't expect the customers to pay back the pawned item. They usually judge how desperate the poor sucker is and make a lowball price offer. Their business works by making way more money by selling the pawned item for way more than they purchased it.

At the heart of it, they offer less money to those who need in the most. That's scummy, any way you want to slice it.

And that's where you're completely wrong and don't understand the business model. It's a common misconception. You're confusing a pawn shop with a second-hand dealer rather than a financing operation. It's exactly the same business as an investment bank, main street bank or credit card operation. They're all the same business model on a continuum that rates on the credit quality of their customers. The lack of knowledge about Pawn shops is common with middle-class folk - and understandable, as a poor person would probably not have the faintest idea on how to lease a Lexus either.

Pawn shops work on interest payments. The pawned item is just the security on the loan. They're after the interest payments, not the physical goods. This is doubly so in the world of Walmart, where just about anything can be bought cheaply, new.

The ideal customer for a pawn shop is someone who regularly pawns something, pays 25% interest per month on a regular basis, and comes back and pays the loan and has their item returned to them. It's not unusual for pawn shops to have regular customers who pawn some family heirloom every year to pay for christmas presents or car registrations, then pays the loan back, and does the same thing next year.

The items for sale in a pawn shop are the result of failed loans. The storage area 'out the back' is the arena of the performing loans. If the display stock is larger than the stored stock, it shows the pawn shop is doing badly because they are making bad loans and having to sell a lot of old stuff.

The actual business of selling the used stuff is just to (a) bring people into the store so they can get new customers and (b) dispose of the items that have been given up by customers, to recoup the capital to make new loans. It's not the main profit centre at all. The reason you get 25% LTV rate on your old TV is because the pawn shop knows you're a credit risk (otherwise, why would you be there), the TV set might be busted and they cannot possibly maintain a good knowledge on the market price of all pawned items, so they give a conservatively low estimate of the value so there is a chance of at least recouping the capital if the load goes bad : ie, the person does not pay it back.

The analogy is that Banks would rather foreclose on a house and sell it rather than collect 30 years worth of interest payments. That's patently not true. While that might be the hypothesis of someone who has just had their house foreclosed, from the point of the view of the bank, they just want their interest payments and want nothing to do with the icky business of courts, keys and irate customers. The very last thing a bank wants is to own houses. That's why they'll do many things to try and get your loan performing again before doing the foreclosure. The unmistakeable sign of a failing bank is one that owns a lot of foreclosed property.

The very same applies to Pawn shops. The quality of their loan book is the key to their business, not the quality of the merchandise in the glass cases.

Again, I think the pawn business is a nasty business but these people fill a need in society, and the regular customers are surprisingly well informed on what a good deal is, and what isn't.

These payday loan places are universally vilified. But people forget the highstreet banks are just as bad - if not worse. Do you know how much it costs me if I go up to 150 pounds over my overdraft limit? 22 pounds A DAY - even if I'm a penny over. In this situation, it's far cheaper for me to borrow from a payday loan place to stop me going over my overdraft limit than it is to incur bank fees.

I hadn't read the HN comments yet when I left the following, similar comment on the original article:

The interest rates are high because the risk is high. Many borrowers simply don’t pay the money back.

If you really think they’re too high, start your own payday loan business and offer your “fair” 36% rate. Be sure to post here again and let us know how it works out.

I have no idea about how this business works but I'm curious, how is it even sustainable? What's preventing the "many borrowers simply don’t pay the money back" from becoming "no borrowers pay the money back" ? Their sense of responsibility/morality alone ? What's the penalty of not paying back ?

Like a former employee of mine, you get sued, then you get a judgement against you, and then they come to your workplace and garnish your wages. At that point the borrower either pays the bill through paycheck deductions or quits and goes to a new job. If the new job is on the books, then the process repeats itself. If the new job is cash-under-the-table, then the loan is never paid back.

Not being able to get another loan when you need it? Possibly need it much, much more than your current one?

The interest rates are high because the risk is high. Many borrowers simply don’t pay the money back.

So we should tolerate placing the burden of compensating for that risk on the poor people who do pay their loans back? It's somehow okay that we're punishing the people who found themselves in a desperate situation who actually are responsible enough to pay their debts, because it makes business sense given that other poor people aren't?

Yes. Because there's no way to tell who's responsible and who isn't at that level with a sufficiently small expenditure on getting that information to make it profitable. If it was, somebody would have done that and competed the current payday loan market out of business already.

You don't mean it's "somehow okay", you mean "it's somehow morally right". No, it isn't morally right. The world isn't fair. The world isn't kind. However, not having this form of credit available at all would be even more unpleasant for those who need it, so all things considered I'd rather these businesses exist than not.

I still remember earning under-18 minimum wage and being happy if my disposable income after rent and food was $15 a week. In those situations, credit of any kind is far better than no credit at all - if the person in question considers the terms unacceptably usurious they always have the option of not taking those terms. All regulation would achieve is to eliminate such businesses - effectively the government taking that choice away because somehow allowing people to choose is not "somehow okay".

It isn't fair. It isn't morally good. It isn't pleasant. But it is what it is. Welcome to reality - sometimes it really sucks.

Because there's no way to tell who's responsible and who isn't at that level with a sufficiently small expenditure on getting that information to make it profitable.

Then maybe the loan shouldn't be getting made. If an industry can't ethically do business, maybe it shouldn't exist. If there's a serious problem that industry is solving (and there is), then maybe it's time for society to step in.

Welcome to reality - sometimes it really sucks.

I'd like to think that drawing attention to suckage could result in people doing something to make it suck less. We don't have to blindly accept our current reality, we can work to change it.

Maybe it would be less unfair if the taxpayer bore the risk? Typically when private industry can't provide a service that is deemed good for society in a cost-effective manner, the government steps in to fill that gap. Why not in this case?

If it's possible to distinguish, beforehand, the people who will pay, a lender could offer them a lower interest rate and still make higher profits.

But if you're a priori indistinguishable from people who have a default rate, yes, you will pay more. You can't be given a retroactive discount any moreso than the defaulters can be retroactively denied their loan. Them's the breaks. Knowledge is imperfect; time does not run in reverse.

Payday loan companies do track who pays and who doesn't. If you sufficiently establish that you don't pay, you will get cut off (and head to the competitor down the road). If you establish that you do pay, by your reasoning, you would expect that your rate would go down. But that's just simply not the case in reality. One step would be mandating that payday loan makers actually report prompt payments to credit rating agencies, allowing someone to actually establish or repair a credit score, so that they can eventually step up into a credit card. Some places do this, but the majority don't, because it's not in their financial interest to do so - those are the people covering the no-fee, no credit-check teaser loans they're making to first time customers, and where any and all profit they do make comes from.

Requiring reliable-payment reporting to outside agencies strikes me as a good, fair idea.

But even that reform is double-edged: by cleaving away the clearly reliable it raises the effective rates for all those left behind at the worst categorization.

And the repayment odds are unlikely to be binary, or stable: someone who repays one loan (but still looks like a defaulter in other respects) may be nearly as likely to default on a subsequent loan. A borrower may at some point even consider a default their 'due', if they look at all the fees they've paid. So the idea that one agency would just specialize in the 'hardest' cases, and never reclassify someone, may make good business sense without being irrational or malicious. The proper 'escape' is then going to another lender (or even better to stop borrowing), rather than renegotiating with a bottom-predator.

I think you should spend some time thinking about how insurance works.

You should start a charity.

Many already exist. I guess I don't understand your point?

What are you going to do personally to address this evil that you seem so outraged by? Nothing.

It's completely dickish of you to assume you know the answer, but you ask a good question. I don't know. That is the hardest part of all this, isn't it? Figuring out what you're going to do to make an actual positive difference in the world. I do feel like calling out the bad when I see it is a start (it's incrementally more than most seem to do, anyways), but I admit that it's ultimately pretty weak. So, you know, fuck you, but sincerely, thanks for asking.

> People abuse eating fast food, drinking too much, tobacco, all sorts of things.

This seems like the right way to think about this, and it leads me to believe that there should be caps on the profits made on payday loans.

For most of the borrowers, these loans are a bad habit. For other bad habits, we have sin taxes that discourage them without totally driving them into the black economy/violent underworld.

I think it's a reasonable policy goal to have fewer payday loan shops, so they're not a constant temptation for the poor. It can't be that crappy a business when most poor neighborhoods have more payday loan shops than grocery stores. If they weren't so profitable, there wouldn't be so many - capping interest and fees seems like a good way to reduce the numbers, while also keeping the borrowers from being ripped off quite as badly.

Well, it is unfair, but not necessarily because it's corrupt. It's just another example of the sad fact that our economic system in general places a disproportionate financial burden on the poor.

Someone who desperately needs $200 to see them through the end of the month is someone who is a lot less likely to be able to pay it back at the end of the month. So the lender needs to charge them a more. It might only be $10— but of course, to someone who desperately needs $200 to see them through the end of the month, $10 is a lot of money.

Meanwhile, someone borrowing a hundred times as much to buy a new car can pay a hundredth of the interest, because they have the income to afford it.

And there really isn't any way around that. At least, not in this political climate.

isn't it also an example of how the system in general fails to educate people not to live over their possibilities?

Why did the person end up desperately needing $200 more than she earned at the end of the month in the first place? Why does he have no savings put aside for the rainy days? Why doesn't this person have a safety net of some kind, be it family, friends, a boss that can pay in advance etc.. and yet ends up with debts at the end of the month?

(there are obviously many reasons for finding yourself in a shitty situation, but from the outside the size of irresponsible personal finance management in the US seems crazy)

Agreed. Having done it it is entirely possible to live on minimum wage quite comfortably.

The problem is consumerism, and the real problem is people desperate for stuff they can't really afford (like, a big TV) and not accepting they simply cannot afford it.

This sucks, ideally everyone should have what they want.

But life is unfair, and for most it just does not work out.

I think you're deluded about how possible it is. Maybe for a single, young, healthy male with very limited space and nutrition requirements it's possible, but add a couple kids to the mix, especially if you're a single parent, then add a medical issue or two, and the situation very quickly becomes untenable. If you're bright you can figure out a way to scrape... until your tire goes flat.

Obviously it is not a generality. However a large number of people in severe debt and money management are there as a result of the reasons I highlighted.

It is misdirection to list the example of "single, kids, illness" as proof of anything. Almost anyone can get ill and hit financial trouble; it is an unexpected and perfectly legitimate problem that can lead you to financial problems, especially if stacked on top of your current circumstances.

Just a single mum with two kids? sure it's not going to be luxurious but I know plenty of people who manage and are perfectly happy. Then again, I also know plenty of single mums who waste money like water. I think such circumstances are often irrelevant to the families ability to get by.

My argument is this; once you throw consumerism, poor money management and an inability to accept the unfairness into the mix it tips the balance in favour of "generally in debt".

What does the political climate have to do with it? Bigger credit risks require a bigger interest rate to make up for the risk.

Yes. In other words, payday lenders drive marginal people further into poverty to make up for the totally insolvent people they (also) snooker into taking loans. That much is clear.

Obviously this isn't the place to go into it, but I'm talking about effective social support.

I don't think anyone thinks it's unfair that someone who simply can't wait to get that new gadget should pay a premium, but there's no rational reason that someone living in a first-world country should have to choose between letting their kids go hungry, going hungry themselves, and becoming a "big credit risk".

Ah, fair enough. 100% agree that some sort of institutional support so that people never have to rely on a payday loan to meet basic human needs (food, shelter, etc) would be a great thing. Don't regulate the market, eliminate the demand for it entirely.

Well, sadly, Wal-Mart doesn't think the demand's going to let up. They've been removing otherwise profitable (I presume) service franchises from their stores and have been replacing them with pay day loan centers. http://www.economist.com/blogs/freeexchange/2010/03/payday_l... A friend in Nevada was using a mail center inside a Super Wal-Mart to get his mail (he travels a lot) and was told by the manager that it was being shut down even though it was profitable because corporate told them to put in the pay day loan center. Kinda depressing really.

This might actually be a place where Wal-Mart using its clout to drive profit margins down is an unequivocal good. Weird.

Well, apart from the whole shutting down other profitable services thing :P

WM isn't all bad. In their effort to drive down prices they actually provide the least expensive option for fresh fruit, veggies, and other healthy foods that lower income people typically forgo because of the cost. Studies have found that when given less expensive options for healthy food people will pick it over the junk.

> This might actually be a place where Wal-Mart using its clout to drive profit margins down is an unequivocal good.

Walmart using it's clout to drive profit margins down is always an unequivocal good. The sole reason a free market is better than the alternatives is that given enough time, margins trend as low as they can possibly go.

That's precisely the point— when one company is deciding which products they want to sell, and that single company's business makes up 30% of your market, more than your profit margin, and they're telling you that you need to lower your prices by two cents this year or they're going to start buying from someone else and you'll have to fire seven hundred people or else go out of business...

How is that a free market?

The whole problem is that Wal-Mart is big enough to drive margins below what is sustainable. Forced reduction in margins leads to lower quality products, layoffs, and eventually the outsourcing of entire manufacturing sectors— and what good is a socket set for 15¢ less than the competition when the socket set company that used to pay you $35,000 a year moves to Indonesia and now pays you $0?

I would call that "good" quite equivocal.

How is that a free market?

A free market doesn't guarantee that you get to stay in business.

what good is a socket set for 15¢ less than the competition when the socket set company that used to pay you $35,000 a year moves to Indonesia and now pays you $0?

Over the long term and looking at the bigger picture, we'll hopefully wind up with a good number of people in Indonesia who are better off.

Sideways reply due to stack depth, sorry...

What's the practical difference between a government saying "You must sell your product for this price or we won't allow you to do business in this industry" and Wal-Mart saying the same thing?

You're right that there might not be much of a practical difference for the company making the socket sets, but they aren't the only factor in the equation. Your question addresses only the seller, and markets are made of both sellers and buyers.

If the government sets price limits, that means the company can't do business even if there's a willing buyer. You're removing the right of free choice.

When it's Wallmart setting a price that they're willing to pay, and it's lower than the price the company is able to sell for, that just means there isn't a willing buyer. Wallmart is in some sense acting as a proxy for the people who shop there, who are clearly saying that price is what's important to them.

To paint an exaggerated picture: if I'm trying to sell my socket sets for $1000 each, and no-one wants to buy them, that doesn't mean the market isn't free, it just means that there isn't a match in the buyer side of the market for my product.

That doesn't answer my question. What's free about it?

What's the practical difference between a government saying "You must sell your product for this price or we won't allow you to do business in this industry" and Wal-Mart saying the same thing?

It is not true that people who get payday loans have no other place to get money. What they don't have is a place to get money as conveniently as a payday loan vendor, a fact which the vendors exploit to extract the maximum possible return from their portfolio of lenders.

Where else can a person with bad/no credit get a short term loan? I'm not disputing this, I'm just curious.

As far as selling convenience, I wish a 24 hour convenience store would open up close to my house and exploit me by overcharging me for products available at less convenient locations/times.

If they own anything with sufficient second-hand value, a pawn shop would work.

Credit unions are one answer.

Can we make a list of places poor who don't have any friends with cash can get quick loans?

I'm drawing a blank, but there must be other options, like you say.

Honestly, it all sounds like a crock. If these predators weren't allowed to treat these people like sharecroppers on their manor, then banks would step in at a lower rate. There is money to be made, even with the risk. It is only because financial predation is not illegal that it happens. The scam is not limited to payday loans, though - look at Rent-a-Center type places also, for a close runner up in sleaze.

It's a good point. A payday loan is cheaper than bouncing a check.

It's easy to think payday loan shops are evil until you know someone who owns one. The people running them typically aren't getting rich off of it. A high percentage of loans don't get paid back. Fraud, forgery, and outright armed robbery are a constant threat. Your employees (who have to be willing to work in a place that will be robbed, at gunpoint, on a monthly basis) aren't much more savory than the customers, and theft amongst them is rampant.

Shit happens, and a lot of time when it happens to poor people, they have no alternative. It's sad that society is structured in such a way that they are forced to turn to a source of credit that charges them so much, but the payday loans do provide a valuable service.

In this particular case, we're talking about an online service, so no unscrupulous employees to get ripped off by or physical dangers to navigate. They also claim to be using advanced models for approving borrowers, and putting in place a bunch of methods to ensure higher payback. All of that implies lower risk, so why aren't the rates themselves significantly lower?

It's not clear why the author decided to compare a ZestCash loan with credit cart debt when they're clearly different products. And while ZestCash's rates of 242% to 462% are high, they are, under certain circumstances, competitive. For example, in Washington state, MoneyMart charges in the 300s.


The point about credit cards was made because it's advice given to middle class consumers. I assume if 30% is too high for people with money, it's even more so for people without. From the perspective of the business making the loans, of course they're different models. I don't see that as the most important perspective, though.

And the fact that ZestCash is competitive with other usurious lending companies really does nothing to improve my opinion of them.

It is pretty crazy how many media outlets will publish articles written by companies without even fact-checking them.

For them it doesn't pay to fact check. In the media business it is all about getting a breaking story out there quickly, and if they waste time fact-checking they are losing readers who are getting the story elsewhere. Clearly this isn't good, but it is the price that we pay for demanding fast, instant news.

At the same time it seems like those who would actually fact check would have a story that no one else has.

This is what was lost when blogs overwhelmed journalism. Fact-checking, accountability and misaligned curation but I am hopeful blogs will evolve over time to incorporate them back.

They already have. You're reading the fact checking right now.

News corporations may be more consistent, but do you really think they're more trustworthy?

Who's watching the watchmen? How do you know that this blog has their facts straight? Have you read any rebuttals to this post? (Already, certain issues that seemed outrageous have been deflated by other commenters.)

*For the record, I feel like being "evil" means to prey on human weakness, for which it seems like the site in question and PayDay loans generally fit that bill.

Who's watching the watchmen? How do you know that this blog has their facts straight? Have you read any rebuttals to this post?

I can't answer those questions any better than you already have:

(Already, certain issues that seemed outrageous have been deflated by other commenters.)

I liked this answer enough to upvote it, but my honest question (the parent) has been downvoted. Could someone share some insight why? I switched from Reddit to HN because I thought this community was less prone to stuff like that, but maybe I'm being too sensitive?

Startup coverage has always been done without the slightest of fact checking. Read your local bigtown paper sometime, and see how bubbly they are about startups, specially local ones.

I gather that the default rate for payday loans is several percent per month, so you'd lose money charging 30% APR (2.2% / month).

Can anyone point to a good article on how the industry works and who their customers are?

Here are a few articles I've read that you might find interesting. The first is NPR's brief look into the payday loan business as a whole and the second demonstrates the wild rate at which these loans are being issued (£1.2 billion issued in 2009 and estimates of £3.5 billion by 2014).



I don't have a link, but Planet Money did a great podcast on payday loans.

The main reason why society does not like pay day loans, is that there is more harm than good in lending money to people who cannot reliably pay back. If you don't have $500 to repair your car and do not have good credit history -- then probably you would be better off without car, because you won't be able to take proper care of that car anyway. And without payday loan it's harder to get drunk/drugged, so society benefits from not having payday loans.

On the other hand it does not make sense to criminalize payday loans, because as gcheong mentioned -- the alternative is broken kneecaps by loansharks.

The result: payday loans are neither prohibited, nor supported by government, and are booed by society.

Without that car, that person can't get to work. Loans are a valuable service to people all across the wealth spectrum.

Even VentureBeat did a positive "review":


They offer $500 for 6 months with $33.5 weekly payments.

So you will end up paying 33.5 * 52 / 2 = $871 ($145.16 per month).

Isn't it cheaper to get something like this on Prosper or Lendingtree?

The people who get these will never qualify for a loan on Prosper or Lending Tree due to low credit ratings, etc.

I hate to see entrepreneurs acting like predators. I like to think we are in it for noble reasons - advancement of humanity, crucial innovation - you know, changing the world. But cold hard cash rules for many.

It makes a certain kind of sense that a guy who left Google for BMG would be capable of such a scummy company.

Easy to say it's predatory but I'm not convinced. These are high risk loans so who's to say that the interest rates and fees charged aren't reflective of that risk? On the other hand I am willing to entertain the idea that if the people who most often used these places don't have access to these loans at all maybe they would be better off.

Who's to say crack isn't fun for some people? You're still a criminal and a drag on society if you sell it.

It's not that I don't think the rates reflect the risk... it's that I think these rich bastards are saddling poor people with loans, and they expect a good portion of them to drown in the loans.

They charge these rates so they can recover vast losses... in the end, the honest people get screwed and even the dishonest borrowers get buried in a tar pit of debt.

Your analogy with drug dealing is quite apt. Because what happens when people can't get what they want through legal channels? Black market. Loansharking. Broken kneecaps. Payday loans may seem to reflect the worst of our society but in actuality they are a step up from other alternatives.

Your argument is that loansharking would be just as prevalent as payday loans, once payday loans are outlawed? You can get a payday loan within walking distance of most every block in the city of Chicago. You can't even legally be a loan shark.

I don't know if it would be just as prevalent, maybe not but I don't think the criminals are going to pass up a proven market opportunity so I think loansharking would increase from where it is now. I do think that for the people who use payday loans today, if they didn't have the option legally, then life for them could be worse overall either by having to deal with loansharks and/or because they end up in some pit that could have been avoided if they had the legal loan option.

Can you comment on my second argument?

These companies know that XX% (not .XX%) will default. They intentionally drive some customers in debt, and then profit on the rest. This isn't providing loans for people in need... this is intentional destruction of people's lives and credit.

There is a spreadsheet in ZestCash HQ with some truly despicable calculations in it.

That's a farcical argument.

X% of people will also default on their home-loans. Ergo, no-one should offer them.

X% of people will default on service payments. X% of people will never claim on their insurance. X% of your customers will never go from 'trial' to 'customer'.

Every business requires examination of the risks and amortization via the costs. So yes, some of their clients will go bankrupt. The rest will be charged high fees. And the pay day loaner? They will make a moderate amount of money, because they DON'T GET BACK THE DEFAULTED LOANS.

They're not taking someone's house when they don't pay back, they're just losing their loan amount entirely.

"I think these rich bastards are saddling poor people with loans, and they expect a good portion of them to drown in the loans."

None of "these rich bastards" are forcing anyone to take payday loans. How are honest people getting screwed if they voluntarily take on the debt?

Honestly, I think this applies more to student loans than to payday loans, given there is no way to discharge student loan debt, no matter how bad your life may get.

The ultimate cost of the loan doesn't simply reflect the risk on the loan; it also reflects a premium that the lenders are extracting for providing a no-questions-asked, 24/7 instant cash offering.

Free market purists point out that payday loan customers can't access "traditional" loans. True. Many of them can't, because they have no income or collateral. And those people can't be loaned money ethically anyways. Meanwhile, a large fraction of people who currently avail themselves of payday loans can access better loans --- but they have to plan ahead (and fill out more paperwork) to do so.

I'm not so much of a free-market purist (i.e no regulation) as a freedom of choice purist. I don't like seeing anyone get taken advantage of needlessly so if there are better alternatives for people I would want them to know about it. So, is the problem here that people just don't know about the alternatives or is it that they see the cost of the extra planning and paperwork as greater than the cost of the premium? I would also think that proper use of a payday loan would be in circumstances you didn't plan for, but some people will make bad choices and use them recklessly.

In India Micro-finance companies are collecting 52% interest. http://business.rediff.com/slide-show/2010/oct/14/slide-show...

Govt regulate these loans unless they are willing to share the risks & responsibilities.

i know we are not supposed to judge a book by it's cover, but man does the ZestCash CEO look like a snake oil salesman: http://gigaom.com/2010/10/12/zestcash-judges-creditworthines...

also you know it's a scam, when the site's page rank, alexa rank and compete rank are set to private.

I know Doug Merrill personally and he's one the smartest, most forthright guys you'll ever meet. You're dead wrong to judge him otherwise on his picture or anything else.

I have also had personal dealings with Douglas Merrill, and I found him to be a thoroughly dishonorable person.

his alexa rank is not "set to private". what are you talking about??? http://www.alexa.com/siteinfo/zestcash.com# didn't check the rest.

I use a special plugin that tells me all those numbers automaticlaly...maybe it considers an alexa rank of 4,343,216 too high to fit in the space.

but that number is horrendous...it's like 10 hits a month

If it's a new site, what the hell do you expect? No wonder there's no pagerank or alexa rank yet, it's too early.

then you should tell him to get a better press photo

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