Something was lost in translation…
Expose Obama
In a rather sloppy borrowing of a payday loan story from the Chinese Xinhua News Agency (misspelled “Xinghau”), FreeRepublic.com recently reported that President Obama made plans during his campaign to come down hard on the industry, limiting the annual percentage rate cap to the same cap put in place for military families, which is 36 percent. They certainly didn’t break this story, but I’d like to draw your attention to what a bad idea this is for consumers and the economy.
This will drive no fax payday loan companies out of business because the rate is unsustainable. Not only is the risk involved in offering unsecured, no credit check payday loans tremendous, but any operating business has operating costs. Banks and credit unions will drop the product like a hot potato and stick the public with overdraft fees once they see that the loans cause them to lose money at that ridiculously low APR.
How much money?
Let’s calculate what kind of profit a 36 percent APR faxless payday loan would garner for a business. For a $300 payday loan that is to be repaid in two weeks, cramming that unsecured two-week loan into a 36 percent APR straitjacket means that the compensation a lender receives is $4.14. That’s all. How is a lender going to pay their business operating expenses and employees with that?
Yet Obama claims in his economic plan that such a cap will contribute mightily to the fight against bankruptcy. As if the two were inextricably connected! I’m amazed that he isn’t aware of studies like this one from Clemson University. Payday loans do not themselves lead to bankruptcy; if an undisciplined consumer is already in trouble financially but does qualify for a loan, that loan may provide extra cash as designed. Yet a payday loan will not turn around a person’s long-term habits. Only self-discipline and financial counseling will.
You’re right on that one. Every operating business has an operating cost. Placing strict restrictions on payday loans by putting interest rate caps will definitely drive the industry out of business. There’s clearly no way possible this industry will survive if this proposal goes into effect. With the way the economy is going, more and more people are turning towards payday loans. Of course the economic system is a deteriorating state, but it still manages to remain above water because of the help from the lending industry. Why should they be punished for providing immediate assistance to the hundreds of millions of people who are in need?
HE OBVIOUSLY DOES’NT UNDERSTAND THE BUSINESS MODEL AND NEEDS OF THE PAYDAY LOAN COMPANY’S NEEDS. RATHER IS BLINDED BY VOTES AND GLORY.
MAYBE… MAYBE NOT
Who in their right mind calculates APR on a two week loan? The fee isn’t interest – it’s a service charge! Furthermore, with all of Obama’s talk about needing to create jobs and generate industry, he’s effectively killing a multi-billion dollar industry and thousands of jobs nationwide. It’s like cutting off the nose to spite the face.
Capital One is still offering unsecured credit starting at $300 for those with no credit or who cleaned up thier bad credit. This is one credit card company payday lenders better watch out for.
Payday loan companies have absolutely nothing to do with the bankruptcy epidemic. My goodness, what has happened to common sense? 36 percent cap. Did they just pull that number out of their butts? It doesn’t make any sense to anyone that knows even a little bit about what it takes to run a business. Yet, they are left in charge of running our country……Are they also going to put a cap on what the automobile industry can charge for a vehicle? Maybe they could put a cap on what cell phone companies and internet providers can charge. Or better yet, why don’t they pass some legislation that puts a cap on how much a person can spend in a casino, or on video games, or on junk food. Is it just me, or has everyone lost their freaking minds?
I’m really worried about this. Payday loan companies can’t survive on 36% margins, it totally destroys their business model.
I really think the “Immediate Assistance” industry exemplifies the “Customer Once, Customer for Life” ethos. I mean, a guy comes in to get a $300 loan against his $800 pay check. Maybe his wife got sick, or maybe his plant gave him a week of furlough time because there weren’t enough manufacturing orders coming in. Right now, they can make his rate high enough that he has to come back in two weeks in order to pay off the last loan and take out a new loan to pay the rent! It’s genius. Right now, I think average rates are about 10% for the life of the loan, so someone coming in for $300 every two weeks is really helping the company out! It amounts to a $60/month fee that allows that guy to keep coming giving them money! It’s really an impressive way to cash in on the blue-collar work ethic.
What’s interesting is that these immediate assistance loan vendors near military bases are still thriving. I think they’ve figured out a way to balance out that 36% APR limit by adjusting service fee schedules to compensate. That would be something to look into. Still, we must be careful, jobs and livelihoods are at stake!
UMMM maybe the point is not to help these business’s but to discourage their growth.
After all we should be striving for less personal credit usage not more.