The Simple Dollar Morning Roundup: Payday Loan Edition

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The upgrade is partially completed at this point, and you should be able to notice the performance difference (no more page errors and such). By the end of the week, everything should be moved over – in fact, I’m planning on spending this weekend doing some programming to improve performance even more.

So, with that being said, I’ve been researching payday loans lately because I’m torn on them. I recently turned down a lucrative proposal from a payday lender to advertise on The Simple Dollar because I’m uncomfortable selling advertising for services that run contrary to what I discuss on this site, but it was this process that got me thinking about such loans. For me, payday loans seem like an atrocious solution to a problem, as their interest rates border on the insane – you’re pretty much throwing money away if you get one. However, it isn’t hard for me to envision situations – even ones that I’ve observed – where even people who know better are reduced to no other choice. I’ve talked to many readers of mine scraping by on minimum wage and they’re wondering what they’re supposed to do when emergencies strike when they have no breathing room at all in their budget – and there is no really good answer to this other than the usual bromides of “get a better job” that really don’t solve the situation. Peruse these links, and please leave your thoughts in the comments.

The Dangers of the Payday Loan Trap A pretty standard description of the bad aspects of payday loans. (@ get rich slowly)

Why Payday Loans Are A Really Bad Idea Want to watch a video saying much the same thing? Here you go! (@ dual income no kids)

Avoiding Payday Loans “What are the alternatives to payday lending? CreditPro suggests: Taking and advance on a credit card, asking family for a loan (in writing), contacting the companies to whom you owe money and negotiating with them, contacting a local credit union, basically anything other than using payday loans.” Their post on payday lenders merely being a symptom is also illustrative. (@ the consumerist)

The problem I’m still having is realistic solutions for minimum wage earners who are in a situation where they don’t have the money to make ends meet. Where do they go? What do they do? Where do lenders like Prosper.com fit into this? I have a lot of faith that there are good long-term solutions to this problem (in fact, expect an explanation of a solution I have next week), but right now there is no easy answer that currently exists in the United States.

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9 thoughts on “The Simple Dollar Morning Roundup: Payday Loan Edition

  1. Payday loans are an agonizing topic for me.

    I joined Prosper and lent out $1,600 to about 30 different folks specifically because I was hoping to help people get out of the “payday trap” (several loans mentioned that exact phrase).

    That said, I understand now why they exist.. and why most banks won’t touch a lot of these folks with a 10′ pole.

    After less than a year with Prosper, a full *third* of my loans are long past due. My estimated long-term default rate (which may be understated) is 50%.

    Banks aren’t charities… and neither are Payday Loan operations. The reason such usurious loans exist is a double-edged sword: insatiable demand by consumers (research shows that 85%+ are NOT for true emergencies) combined with greed by lenders who realize that 1) default rates will be very high and thus 2) no decent bank wants to deal with it.

    Ideally, non-productive loans (i.e. loans for depreciating items rather than non-depreciating items & health care) would be provided by a charitable foundation with strict laws against giving OR receiving such a loan. Fat chance in our consumerist society.

  2. Payday lenders are bloodsuckers, pure and simple. That our society offers no real safety net for the people in the position you describe doesn’t make it okay for payday lenders to swoop in and take them for what little they may have left. They don’t solve whatever financial problem you may be facing; they exacerbate it. Good for you for refusing to channel people coming to a personal finance blog (who may therefore be in serious financial distress) to those vampires.

  3. My, my…”bloodsuckers” that “swoop in…” I’ve yet to hear of a case where someone was dragged kicking and screaming into a payday loan store! Most payday loan operations are legitimate businesses that don’t break any laws and provide a much-needed financial option for those on a tight budget. Payday loans are cheaper than credit card advances, bouncing a check or paying a late/disconnect fee. Demonizing payday lending shows a clear lack of understanding on the issue.

  4. My wife and I have been burned first-hand by the supposed “Working Poor” in the form of family. The problem is that many of these people keep doing the same thing every day and expect a different outcome. That’s not how the world works, I’m afraid. Also, they are definitely the grasshopper to Aesop’s ant. When times are good, they are happy. When something bad happens, they are desperate. The problem is they lack the financial discipline to set a little aside when times are good. Why is this my fault? Why is this society’s fault?

    The reason the car repair is an emergency, more often than not, is because they went out last Friday night and spent a little more than they expected. Or they bought some new electronic doodad. I’m sure we can find a whole bunch of people who are legitimately poor. They’ve been cleaned out by huge medical bills or are the “single mother trying to raise X kids on minimum wage”. But I would wager for each one of those families you could find 10 who are just living beyond their means and every little blip sends their financial world into a tail-spin.

    Needless to say, my wife and I have cut off support for these folks. They know the subject is verboten with us. I do feel bad for those who cave and help them out.

    Case in point, our grasshopper had their only car break down. No way to get to work, no way to earn money. Sounds like a pretty bad situation, doesn’t it? Needed $300 to get it back from the shop. We were steadfast but grasshopper’s mother (who lives on disability and has no money to her name) decided to help. $300 changed hands, the car was repair, and grasshopper went back to work with a promise to repay when their paycheck arrived. A week later I hear in casual conversation that the previous Friday night, grasshopper dropped $100 on a night out. Ummm, where did that $100 come from? And why didn’t it go directly to paying back the $300?

    It’s been over a month and not a penny has been repaid to grasshopper’s mother….but, I hear grasshopper is pricing plane tickets for a trip in the near future.

    Payday lenders may be blood suckers, but I would bet that many of their victims are regulars who spent a lot of other people’s money before they sank low enough to be stuck asking Payday Lenders for help.

    -Toby

  5. Paying $520 in interest on a loan of $200 (see the first link in this post) is not cheaper than bouncing a check, paying a reconnection fee, or paying even the most extravagant overdue fee. My understanding of that is quite clear. There’s a reason this “service” is effectively banned in 11 states. People may be in need of cash–they aren’t in need of insanely usurious loans that only drag them down further.

    And as for the suggestion that poor people effectively deserve to be preyed upon–I seriously hope that people who think this way never have to face personally the reality that most of us, be we never so frugal, are just a relatively short period out of work or a single serious illness away from poverty. Of course people make bad choices (everyone does–it’s just that some of us are lucky enough to be more insulated from the consequences than others are), but they’re still human beings, and the average working poor person who does depressing manual labor at two jobs to pay for an apartment works a hell of a lot harder than many smug middle-class people ever will.

  6. Having used a payday loan a few times when I was in debt and not being a minimum wage earner, I concur with all the negatives about payday loans. However, the problem isn’t the payday loan companies, it is the fact that there is no regulation capping them. Likewise, states like Delaware that allow exorbanent caps for banks to charge interest rates is just as bad.

    Additionally, the people wanting payday loans have facilitated in the payday loan business. It is poor prior planning and money management. It has nothing to do with the being a minimum wage earner. Just because you make less or more does not mean that you cannot be responsible for a budget and living within your means.

    Pay day loan companies exist, because people are bad at managing their money. I was. There shouldn’t have been any reason for me to have had to go to a payday loan place in the first place.

    Although I think there should be laws capping interest ceilings and there should be something done about payday loan companies, it is really the fault of the individual for going there in the first place.

  7. Interesting tangentially related question: Would banning Payday Loan locations merely shift the business to even higher interest Pawn Shops? If someone wants/needs to borrow money… and the easiest source isn’t there… what happens then?

  8. Hello everyone

    I have read and done a lot of research about paydays. I compare payday loans with credit cards and found out that payday loans make it way much harder for low income borrowers to get ahead financially than credit cards.

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