(Photo via Bensonkua, Flickr.com)

Black Friday has been the top trend for the past several weeks. Everyone is itching to find great deals offering for Black Friday 2009. Black Friday, which lands on the day after Thanksgiving Day, unofficially kicks off the holiday shopping season. And boy, things are looking hot, hot, hot.

Dirt Cheap Target Appliances

Who needs payday loans when you can get $3 Target appliances? Apparently, according to rumors, Target’s $3 appliances will include toasters, coffee makers, sandwich makers and slow cookers to name a few. And we’re not talking low-quality products. $3 Target appliances are made by Chefmate. Target will also give away a $10 gift certificate for every Benjamin you spend between 5 a.m. and noon. My question is what the heck is Target thinking? Don’t they know this could possibly start a war?

More Black Friday Deals at Wal-Mart

Wal-Mart Black Friday ads is particularly causing excitement because of their hot Black Friday special on Blackberry phones. Wal-Mart is offering a free $100 gift card on any Blackberry purchase with a 2-year contract. Fortunately, buyers will not have to deal with just one cell phone carrier. Wal-Mart has teamed up with all four major cell phone carriers: AT&T, Sprint, T-Mobile and Verizon Wireless. Even better, you don’t have to wait till Black Friday to take advantage of Wal-Mart’s Black Friday offerings. Items from Wal-Mart Black Friday Ads 2009 will hit store shelves on Saturday November 14.

Best Buy: Making the Best of Black Friday 2009

Best Buy, one of America’s favorite retailers for consumer electronics, is also catching headlines with their extensive Black Friday ads this year. From what it looks like, you probably won’t need payday loans to make the best buys. They have cell phones, kitchen stuff, household appliances, television, computers, digital cameras, video games, movies, and more – all with incredible markdown prices!

For instance, you can get an Insignia Blu-ray Disc Player for less than 100 bucks. What about a Magellan SE4 GPS? With this GPS device you can easily locate interesting destinations in all the 48 contiguous states, Hawaii, and Puerto Rico. The Magellan SE4 GPS is going for only $119.99 at Best Buy. That’s a $60 saving on just one item! Check out Best Buy’s Black Friday ads for more offerings.

Don’t Forget To Plan and Budget!

With all these offerings available during this time of the year, more people are feeling the urge to spend. Of course, Black Friday is the best time to spend and save money along the way. Your urge to spend, however, can still leave you in need of financial help if you’re not careful. So don’t forget to plan and budget for all your holiday needs.

Debt relief is possible, even if you have to plan a Thanksgiving meal. (Photo: Wikipedia.org)

If you find yourself inhaling the last of the crouton dust after a fruitless search for the elusive meal, you are likely in need of debt relief. I’ve been there before, so I feel your fruitlessness. Now that Thanksgiving has flickered into view like flames from a toaster slot, you’re going to have to do a little bit better, particularly if you’re going to be having people over.

Plan and Save from Your Man Cave

Or feminine aerie, or whatever you call your esteemed hovel. You can plan how much food you’ll need and save some money in the process. That’s debt relief with wings that work, unlike the ex-bird that will grace your table.

Or Will You Even Give Them the Bird?

There are lots of other solutions, including ham, enchiladas or the gluten-free vegan feast of your choosing. But the main things you need to know are how long you’re going to entertain, how many people you’ll have and what time of day you’re doing this. If you’re doing an after-dinner party rather than an all day football gorge fest, you know you won’t need as much.

But Let’s Get to the Menu “Rules of Thumb”

Thanks to About.com, here are some general guidelines for you to follow. I’ve added my own comments, as I’m sure you’ll deduce. They’ll make Thanksgiving cheaper and contribute toward your debt relief journey.

1) Round Up When You Estimate

Better a little too much than too little.

2) Offer Ample Choices

Contrary to what you might think, more choices equals less of any one item. A little of this and a little of that instead of industrial-sized portions of an old stand-by make Thanksgiving parties spicy and (generally) cheaper for you.

3) Assume They’ll Try Everything

But they’ll likely go small, so that’s more leftovers for you! Trust me, it’s a psychological thing akin to nobody wanting to be “the one” who ate the last cookie.

4) Go Bulk for Sit-Down Dinners

Go with breads, nuts, olives, pretzels or anything cheap. This saves on prep time for those of you with no culinary skills. Besides, lots of bread will fill them up fast, make them feel like fat slobs and lower their resistance to your hypnotic suggestions. Tell them to stop eating and leave immediately… but wait until after dessert. The world’s all right with pie.

How Much SHOULD One Person Eat?

This varies, but you can do the math and figure out where the budgetary debris will fall.

Hors d’oeuvres and Salad?

Six bites before a meal. Remind them of Botswana if they object. If that’s the meal, think four to six bites per hour. With green salad, one ounce is right. Excess lettuce leads to emission problems (see the bean barb below).

Le Main Course?

Poultry, meat or fish are acceptable. About.com says six ounces per person if there’s one main dish, eight if there are two or more. To me, that seems counter intuitive to the myriad bulk plan offered above, but perhaps your guests are zombies and their lust for carne cannot be sated.

Rice and Grains? Yes Please! Pasta too!

One-and-one-half ounces as a side dish, two in a main dish like risotto. Can’t go wrong there, I think. And for pasta, think two ounces as a side, three for first course and four for main. Not all of those, however. Pick one. Repetition will cause your guest to plot your demise as you sleep. Change it up and you won’t have an “Ox Bow Incident” on your hands.

Get Starchy

Five ounces of potatoes should do it. The starches lull the mind into trance more readily, to which I’ve already alluded. It also weighs them down if you plan to use your guests as tackling dummies later.

Veggies and Beans within Your Means

Think four ounces of vegetables and two ounces of beans per person. I cannot stress enough that you adhere to think, particularly when it comes to the beans. You’re going to be locked in tight quarters with many people for a few hours, so think about it. If you have a gas stove, it’s a no-brainer.

You May Now Have Dessert

One thin slice of cakey substance is appropriate. In fact, it’s very cosmopolitan. If you’re going to get gushy, four ounces of pudding will do. For ice cream, think five ounces. If you mix the two, cut the portions in half. You’re out to perform debt relief surgery on yourself, so you don’t need pastry blobs giving you a hard time. Give those creampuffs the what-for if they question your stinginess.

But as always, do this in the most thankful manner possible. It is Thanksgiving, remember!

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Image from Flickr.

People tend to get very stressed out during the holidays. From mid-November to January, the ringleaders of families or groups of friends often appear tightly wound and overworked. If you’re the one saddled with hosting, planning and making Thanksgiving dinner this year, it doesn’t have to be that way.

The key to having a low-stress Thanksgiving is knowing “perfect” is a relative term. Realize in advance that everything will not fit the textbook definition of perfect. If you’ve got food and people at the table, you’re in good shape. Don’t get caught up in the details. Remember that Thanksgiving is remember what we’re grateful for, not being upset about things that don’t go as planned.

There are a few other things you can do this weekend to help things goes smoothly.

Plan your menu

A little planning today will save you a lot of stress next weekend and in the days just before Thanksgiving. As you’re planning out your meal, make sure you take cost into account so you don’t end up needing online cash loans at the last minute to pay for food. This weekend, sit down and plan your menu. If you have others contributing, call them to confirm what they’re bringing.

Find recipes for all the dishes you plan to make. Print them out and make a shopping list so that next weekend you are ready to hit the grocery store. Make sure you check your kitchen for the stuff you already have. Think carefully about kitchenware that you’ll need so if you have to buy a whisk or a turkey pan or a serving dish, you can get all of the food at extras at the same time.

Get your RSVPs

Make sure you know how many people are coming to your dinner, as this is crucial to planning your menu. However, I recommend making extra food for two reasons:

1. Leftovers are awesome
2. It will keep you from stressing out in the event of unexpected guests

My family and friends are the type of people who would invite the UPS delivery person in for a slice of turkey. If you make extras, you can open your home to people who happen by and share the warmth of your celebration and your food without feeling added pressure. If you end up with the expected amount of guests or fewer, keep the leftovers, and that’s a few more days when you won’t have to cook.

Image by flickr

Yes, NASA is reporting today that it has found water on the moon. How did they do that? Well, to put it in layman’s terms (because that is the only language I speak), they sent a rocket with all kinds of sensory instruments hurtling toward the moon. When it crashed it created a big plume of debris, and this sensitive rocket detected that there was water in it.

So, if you picturing a puddle or a river or pond, that’s not quite the case. The rocket reported that there was water vapor and ice grains. NASA discovering water on the moon has got people talking about what they could do with this water. As is the American way, a lot of people are throwing around ideas for how they could make money off of it, even though no money lender in her right mind would invest in moon water products.

Ideas for water on the moon

I have one particularly witty friend who wrote on Facebook today: “Ice found on moon! Get some barley, hops and yeast up there and start brewing!” I came across a space blog that said “I don’t have to tell you about the implications here. Just think of how much you could sell authentic Moon bottled water for.”

Both of these ideas, bottled moon water and moon beer, would most definitely sell. I would pay a good chunk of money for moon beer. I am sure people with tons of disposable income would pay staggering amounts for a bottle of moon water.

Marketability is not the problem

Of course, no matter how much money people are willing to pay for moon water or moon beer, there’s no way the sale price would cover the cost of collecting water on the moon. Everyone knows space travel and exploration are super expensive. Almost as expensive as war.

So before you start making phone calls to investors or designing moon beer labels, remember that profit means you have to take in more money than you spend. Still, if anyone out there does end up making moon beer, please let me know.

(Photo imuttoo, Flickr.com)

Best Buy Black Friday ads can now be found online and it’s definitely causing hype. How would you like an Insignia Blu-ray Disc Player for less than a $100? What about a Dynex 19″ 720p LCD HDTV for less than a $150? Save your drools, however, because things are about to heat up ever more.

Best Buy is tackling Black Friday with their hottest Black Friday deals from Kitchen & Housewares to automotive and home theater appliances. With Best Buy’s great Black Friday offerings, you probably won’t need payday loans after all to make ends meet during the busy holiday season.

Best Buy Black Friday Ads 2009

According to BlackFriday.info, you can find great Best Buy Black Friday deals throughout the whole store. For instance, if you happen to need a new phone, check out these Black Friday cell phone deals at Best Buy.

AT&T Sony Ericsson W518a – Free w/2 Year Contract *

BoostMobile Motorola Clutch i465 – $59.99 eBay

DLO Jam Jacket For iPhone – $9.99

Jabra BT-2080 Bluetooth Headset – $19.99

LG Chocolate Touch From Verizon w/Two Year Activation – $0.00 *

MiFi 2200 By Novatel Wireless w/Two Year Activation – $0.00

What about a new television set? I know the hubby would love a bigger screen at home, right in time for the 2010 Super Bowl bash.

Dynex 19″ 720p LCD HDTV (Model # DX-L19-10A) – $149.99

Dynex 32″ 720p LCD HDTV (Model # DX-L321-10A) – $299.99 *

Dynex 40″ 1080p 60Hz LCD HDTV (Model # DX-L40-10A) – $499.99

Insignia 42″ 1080p 120Hz LCD HDTV (Model # NS-L42Q120-10A) – $699.99 *

LG 32″ 1080p LCD HDTV (Model # 32LH30-UA) – $439.99

Who needs payday loans at this rate? You can get the extended list for Best Buy Black Friday Ads 2009 here.

Go beyond Black Friday Ads and save money!

If you want to save money take advantage of all the special offerings for Black Friday 2009. But if you want to save more money, do your own research. You can find other great deals than just Best Buy Black Friday Ads. Major retailers like Wal-Mart, Sears and Target are doing their best to attract more customers during this time of the year when people are searching for the best places to spend their money for the holiday festivities.

Keep in mind, however, that just because it’s a Black Friday offering doesn’t mean it’s the best deal out there. Make a list of things to buy, search for Black Friday deals from various retailers, and compare prices. You’d be surprised with how much more money you can save just by doing a little research.

Have you had it up to here with your bank's overdraft protection schemes? You aren't alone, according to the Center for Responsible Lending. (Photo: flickr.com)

If you’re able to see past the shady origins and history of the Center for Responsible Lending, you’ll see that occasionally they do good work that benefits society. While they’re certainly no friend of the payday loans industry, I find that their recent report on the overdraft fees and overdraft protection rackets is worth noting for any financially conscious consumer. Personal Money Store wants you to be informed when it comes to your money, so take the CRL’s findings as a word of caution when it comes to the twisted world of overdraft fees and protection.

Major Overdraft Findings That Should Give You Pause

Overdraft fees and overdraft protection costs have skyrocketed in recent years. According to the CRL’s findings, there are three shocking points of which we should all be aware:

1. Overdraft occurs frequently. Over a 12-month period, the CRL found (based upon Federal Reserve data) that more than 50 million Americans overdrew their checking at least one time. Of those, more than half (27 million) had five or more.
2. How much operating income did overdraft feeds produce for banks and credit unions in 2008? Try $24 billion. Broken down, it’s been noted that a credit union could derive as much as 60 percent of their operating income from overdraft fees and overdraft protection.
3. Think overdraft is under control? Think again. From 2006 to 2008, the CRL found that banks and credit unions upped the penalty by 35 percent.

Were You Even Asked to Opt Into This?

For most people, the answer is no. When you sign up for a checking account at your bank or credit union of choice, you’re automatically enrolled in an overdraft program. And buried in the fine print of your contract is the overdraft fee schedule. Generally, transactions consumers don’t have the money to cover are automatically paid by the bank or credit union. What the consumer gets for the trouble is a penalty per transaction in the neighborhood of $34. Furthermore, banks and credit unions tend to charge an additional daily fee for as long as a consumer’s account balance remains overdrawn. Regardless of whether an account is overdrawn by $100 or $.01, fees can mount – and no bank or credit union I’m aware of works on a sliding scale. It’s all about flat fees that the consumer must pay. And CRL research indicates that for every $1 in overdraft protection credit extended to consumers using their debit cards, $2 in fees are assessed.

The Banks’ Defense

It’s all about protecting a consumer’s good name, they might say. By providing this “service” to customers, banks and credit unions claim they’re keeping people from bouncing checks. NSF fees from banks, bad check fees from merchants and (potentially) other late fees could amount to a person’s picture being hung on the wall in mug shot-like splendor.

Bouncing Checks Aren’t the Story, However

Debit card and ATM transactions are the big issue. The CRL finds that if banks and credit unions wanted to, they could simply decline transactions that would put consumers in the red. However, most do not do this. They pay for the transaction but “help” the consumer by severely penalizing them. While consumers should certainly be responsible with their money, digging unnecessarily deep holes for them to try to climb out of after they’ve already made mistakes is a questionable tactic on the public relations front. In the end, it comes across as a money grab.

The Reordering Transactions Shell Game

Did you know that banks and credit unions reserve the right to reorder your banking transactions from highest to lowest, even if the lesser transactions occurred first? This catches millions of consumers who gamble that a large expense won’t clear until after their paycheck is deposited. If you’ve ever done this (I know I have), know that you’re playing a losing game.

Automatically Dragged Over the Coals

This is what John and Jane Consumer typically get when they sign up for a standard checking account. Many aren’t even aware that cheaper options are available. Some banks may offer a cheaper, more formal line of overdraft credit, or even a link to a savings account in the case of overdraft. However, even these can be expensive. Payday loans, when used properly, can cost even less. Did you expect me to say otherwise?

A Terrible Trio for Consumers

Using FDIC data from 39 member banks, the CRL digs into just what the overdraft fee jungle means for consumers. They do this by addressing the three points raised above.

1. Overdraft Occurs Frequently

Of the 6.5 million accounts held in the FDIC sample, around one in four experienced at least one overdraft over the course of a year. One in seven experienced five or more. As mentioned earlier, this translates to about 51 million Americans stuck in the overdraft fee quagmire. Those with five or more instances are sinking beneath the muck. The CRL found that repeat offenders tended to be of lower income, single, non-Caucasian renters. Considering that the FDIC points to the 18 to 25 age group as being most likely to fall into the overdraft trap, it seems that more effective financial education is in order. Learning to control excessive impulse spending, balance the checkbook and consider options like payday loans in emergencies could help anyone.

2. Excessive Overdraft Fee Profits

Banks and credit unions are conveniently not obligated to report what they make on customers’ overdraft fees, but the FDIC did manage to compile from a sample of its member banks. They found that that around 69 percent of their service charge income came from NSF fees. Extrapolating the data, the CRL finds that this amounts to $34.3 billion in fees for 2008 alone for all service fees. Sixty-nine percent of that is $23.7 billion, a staggering sum that should be much lower. As banks, credit unions and even credit card companies are jacking up fees, that figure could be even larger in 2009.

3. Fees are Out of Control

As I was saying, overdraft fees are a source of concern for any consumer who depends upon the traditional banking industry to care for their money. As the collection has increased 35 percent from 2006 to 2008, the CRL wonders if there’s a ceiling. Organizations like the proposed Consumer Financial Protection Agency and the Credit Card Bill of Rights are designed to help make right what has gone so far wrong, but will they have the healthy canine teeth to tear away the sweet meat?

As mentioned, fees for individual overdraft transactions and days a balance is in the red are commonplace. A cup of coffee, a tank of gas and a few miscellaneous convenience store purchases can quickly and silently become hundreds of dollars in overdraft fee debt. The CRL finds that the monthly average for individual debt card usage is 17. More than a quarter of those are for less than $10.17 on average. Imagine the possibilities across the banking industry. Since this use has exceeded credit card use since 2005, it’s also no wonder that the credit card industry has sought myriad ways to charge their customers with fine print clauses.

Fruits, Vegetables and Overdraft Fees

That sounds like part of a balanced diet these days. The CRL frightens us all with the details of how Americans spend “about the same amount” on overdraft as they do on fruits and vegetables. As for grains and other essentials like postal stamps and books, overdraft fees are clearly in the lead, say the CRL. Considering how difficult financial matters are during the recession, is it any wonder that the CRL found that most consumers would prefer that a transaction be denied than to have to paid exorbitant $34-per-transaction overdraft fees?

How Can This Problem Be Fixed?

This is your checking account on overdraft protection. (Photo: http://tolweb.org/)

Beyond preparing consumers to make sound financial choices, the financial abuses inherent in the traditional banking system must be exorcized. The Federal Reserve is considering that very matter, as is Congress. Large-scale change is needed.

Prohibit Overdraft Fees on Debit Card and ATM Transactions

This exception would be a welcome aid. If a fee is absolutely necessary, then a bank should have to provide a more highly visible, real-time warning so that debit and ATM infractions don’t fly under the radar and destroy overtaxed consumers’ budgets. If warning sign appears, consumers would have the choice to back out of the transaction (if the merchant didn’t simply rule out that method of payment). Some banks and credit unions block such transactions completely. The CRL suggests that all should follow the practice.

Overdraft Fees Should Be Proportional

The CRL’s finding that the amount that banks pay out to merchants for consumer overdraft is about half of what they actually charge consumers for the “convenience” is another signal beacon that change is needed. Flat fee overdraft charges are unnecessary when compared with the actual cost of covering the overdraft to banks and credit unions. It is understandable that banks and credit unions have to think of profit margins, but the current overdraft fee system is tantamount to gross customer abuse. The CRL suggests that an overdraft line with a reasonable rate of interest would be easier for consumers to swallow. Then again, rather than dealing with revolving interest, why not use payday loans?

There Should Be a Limit

If a consumer dashes their checking upon the overdraft fee rocks, banks and credit unions should be required to offer an alternative product at lower cost. A consumer shouldn’t be allowed to rack up more than six overdraft fees per year, says the CRL. This is what’s called weaning traditional financial institutions from their habits of excessive profit. Getting by with a reasonable profit margin may mean fewer executive retreats to Cabo San Lucas, but it’s the right thing to do.

No Overdraft Protection Without an Opt-In

This is self-explanatory. No service or accompanying gross fees should be thrown at a consumer without their approval. The CRL found that around 90 percent wanted to be able to choose whether they would have overdraft protection or not, so banks and credit unions should listen. If not, they run the risk of losing even more customers to payday loans when financial calamity strikes. Banks and credit unions certainly have a larger war chest to draw from, but that doesn’t mean they shouldn’t try to be competitive.

Make Banks Toe the TILA. Payday Lenders Do!

The Truth in Lending Act requires that lenders disclose certain information to the public. It seems that information regarding the amount of money banks collect in overdraft fees should be included in the purge, much the same way payday loan companies make their APR known. Since overdraft protection is an act of extending credit to a consumer, banks and credit unions should be forced to clarify just what they’re charging customers. No bank or credit union should be exempt from the law.

There’s Nothing Up My Sleeve

The Consumer Financial Protection Agency is on its way. President Obama made a great deal of show about the related Credit Card Bill of Rights. It’s time for banks and credit unions to be made to tow the line. If you’ve even gone through the hassle of dealing with overdraft, you know that there has to be something better behind the curtain. In the case of payday lenders, there’s nothing “up the sleeve.” In a short term financial emergency, payday loans are up front about fees, which typically are much less expensive than falling back on overdraft protection. The consumer should have the power to choose what fits their financial circumstances best.

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Image from flickr

Although many people are not aware of it, the medical industry is one of the few American industries where negotiating the price is not only acceptable, but common. The reason many uninsured or underinsured people are quoted higher prices than insured individuals is because the price for many services has already been negotiated down by the insurance companies and HMOs. However, this practice is not limited to major institutions. Individuals can — and do — negotiate the price for particular services on a regular basis and this can result in significant savings.

Negotiating can save you up to 60 percent

According to Consumer Reports, only about thirty percent of Americans even try to negotiate with medical care providers; however, of those who try, 93 percent are successful at least once. The average savings are between thirty and sixty percent of the original amount owed, though there are many stories of people saving as much as ninety percent through effective negotiation. There are no guarantees that negotiation will get you a discount, but experience shows that most people who make the effort are successful to some extent.

Step One: Negotiate in advance

The first step to negotiating medical expenses is to negotiate terms in advance for planned medical visits and examinations. Due to problems with delayed payment, many medical service providers offer “prompt pay” discounts that can reduce your medical bill by as much as ten to twenty percent. These discounts are usually reserved for those who are able to pay for planned medical services at the time of the visit. However, many providers will also offer a prompt pay discount to those who are able to make large, although partial, payments on the spot.

Step Two: Talk to the CFO

The next step is to speak with the provider’s Chief Financial Officer (CFO) after you have received your bills. More often than not, just asking the CFO for a discount will get results. However, to do this effectively you have to know what is reasonable from the provider’s point of view. For this reason, you should know the average cost in your area for the services provided and you should ask for a price in that range. You can find out what the normal charge for various services is by looking at websites like Healthcarebluebook.com and many insurance company sites.

Step Three: Discuss payment options with the billing department

If you get a discount from the provider’s CFO, you probably will not be able to negotiate further discounts from the billing department. However, you may be able to negotiate an interest-free payment plan. The interest that accrues on medical expenses paid over time can be significant. Negotiating a payment plan that does not include interest will greatly reduce the amount you ultimately pay.

You have nothing to lose and much to gain

Contrary to the impressions of many people, most medical service providers are willing to negotiate and rarely expect everyone to pay every cent originally charged. In fact, many providers specifically budget for a lower repayment than they initially bill. For the consumer, there really is nothing to lose by trying to negotiate discounts and reasonable repayment terms. The worst case scenario is that the provider will refuse to grant a discount. But negotiating is worth the effort. As Consumer Reports has documented, 93 percent of those who try do in fact get a discount.

Payday Loans have the green light when it comes to going where the financial need is greatest. Access to conventional credit plays a large role. (Photo: flickr.com)

Payday loans are an inescapable landmark in America’s modern economic landscape. The popularity of the short term loan product has grown significantly since the early 1990s, and it’s no wonder. Giving consumers the ability to absorb financial shocks in the short term – enabling them to avoid hefty penalties – is useful for maintaining economic welfare. It is important for consumers to be educated as to their alternatives in a financial emergency, however. For their part, the payday lending industry (organized under such groups as the Community Financial Services Association and the Online Lenders Alliance) has helped to educate consumers as to how payday loans work and when they should or shouldn’t advisably be used. However, the responsibility rightly rests with the individual.

Unfortunately, the image still persists within the popular media that payday loans are an instrument through which unscrupulous businessmen and women exploit “at-risk” members of society. One of the primary means these critics use to attempt to prove their point is by focusing on the geographic clustering of brick-and-mortar payday loan locations (as well as pawn shops and check cashing outlets). This fails to take into account online payday loan companies and aggregators like Personal Money Store, whose average customer by income tends to fall comfortably into the middle class. However, when brick-and-mortar locations only are considered, a clear pattern of going where demand is greatest becomes apparent. A recent study by Robin Prager, the Assistant Director in the Division of Research and Statistics for the Board of Governors of the Federal Reserve System, supports the assertion that payday loan businesses tend to cluster in areas where access to credit may be restricted and liquid assets that help consumers handle financial surprises may be closer to scarce than abundant.

“Determinants of the Locations of Payday Lenders, Pawnshops and Check-Cashing Outlets“

Prager groups payday loans, pawn shops, check cashing and a number of related short term loan companies under the name “alternative financial service providers” (AFSPs). Recognizing the controversy the rapid growth of these institutions has generated, Prager analyzes the geographic placement of AFSPs. Using county-level data for the entire country, she expands upon the regional work most studies had undertaken before. Demographics, population, consumer credit profiles and the degree of strictness in state and local laws all play a role in where the largest clusters of AFSPs appear.

Rules and Regulations Facing AFSPs

Payday lending, pawn broking and check cashing aren’t overnight sensations. They date back to at least the 1930s, although payday lending may date back to Colonial America and pawn broking in its various forms is particularly ancient. As with any explosive growth industry, there has been a need for regulation. AFSPs are subject to regulations on the federal, state and local level. Such things as the Gramm-Leach-Bliley Act, the USA PATRIOT Act, and the Bank Secrecy Act all have jurisdiction. Moreover, all loan companies must follow the federal rules of the Truth in Lending Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Debt Collection Practices Act, and the Talent-Nelson Amendment to the 2007 Defense Authorization Bill, to name a few. On the state and local level, numerous and variable other regulations exist. It’s safe to say that a regulatory maze exists when it comes to AFSPs. While they do serve to protect consumers against potential exploitation, the question as to whether over-regulation has stifled competition with the consumer financial services industry is a more than legitimate area for study.

Urban vs. Rural Distribution

Prager found that in 2006, 98.9 percent of rural and 99.6 percent of urban counties in the U.S. featured at least one bank or thrift branch. Furthermore, two-thirds of rural and 90 percent of urban counties had at least one AFSP provider (payday lender, pawnshop, check casher, etc). Considering population by county, the average of 33,000 people were serviced by 2.5 payday loan stores, 1.2 pawn shops, 1.7 check-cashing outlets and 10.7 bank and thrift branches. On the urban side, the numbers change to 220,000 people, 16.6 payday loan stores, 7.4 pawnshops, 21.2 check cashers and 67.5 bank and thrift branches. AFSPs like payday loan companies are certainly not more prevalent than banks in Prager’s sample.

Where Do the Payday Lenders Congregate?

Prager found that the highest concentration of payday loans outlets on a per capita basis came in southern states where regulation is more forgiving: Alabama, South Carolina, Tennessee, Mississippi and Louisiana. Pawn shops concentration was also high in such areas (primarily Alabama, Mississippi and Tennessee), although check cashing ranked highest in California, Delaware, Mississippi and North Carolina.

Banks and thrifts found their highest concentration in the north central states, including Kansas, Nebraska and North Dakota. This did not tend to correlate into having a negative effect on the number of pawn shops and check cashing outlets in a county, but Prager did find a positive correlation when it came to payday loan stores.

Credit Scores Point to Subprime

Here is where we get to the heart of the matter with AFSPs like payday loan stores. They tend to appear where the need is greatest. If consumers have difficulty security mainstream credit in an emergency, then payday loans become a very attractive option. Prager introduces an equation that factors credit availability and a variety of other factors in order to express the number of AFSP outlets as a function. It is a function of the following demographic data: racial/ethnic mixture, age, consumer education, poverty standing and the county’s population density. As stated, creditworthiness and area regulations are also factors.

Here are some of Prager’s comments on results:

Looking first at the equations explaining the number of payday loan stores per million capita, we see that the results are fairly similar for urban and rural counties. In both cases the number of payday loan stores per million capita is negatively related to the share of the population that is Hispanic, positively related to the share of the population that is non-Hispanic black, and unrelated to the share that is Asian. Payday lenders are more prevalent in both urban and rural counties where a larger share of the population is below the age of 40 and less prevalent in both urban and rural counties where a larger share of the population lives below the poverty level. The number of payday loan stores per million capita is significantly related to the share of the population with a high school diploma (negative sign) and population density (positive sign) in rural, but not urban, counties.

Patterns in Payday Loan/AFSP Placement

Prager recognizes a few general patterns: 1) Payday lenders/AFSPs appear in credit challenged areas; 2) But they tend to avoid areas where the poverty level is highest; 3) AFSPs and other payday loan businesses aren’t seen to be particularly concentrated in Hispanic regions; 4) Payday lenders do tend to appear more in the African-American community; 5) population density and payday lending presence are connected in rural areas, but not as much in urban; and 6) Not surprisingly, areas with tighter regulation show a much lower instance of payday loan companies.

Payday Lenders Do Not Prey on the Poor

This is what Prager found based upon county-to-county data and it runs contrary not only to what the mainstream media would have you believe, but to the findings of a number of past studies. Credit scores remain a prime factor in distribution of AFSP. Going where the need is greatest is an idea that holds up in this instance. Mainstream credit may be less expensive on average, but if a consumer does not have the credit to access such a thing, then payday loans are the best options. As federal, state and local governments devise new ways of continuing to limit the industry, what exactly do they think credit-challenged individuals are going to do? If sinking beneath the waves of poverty so that they’re “out of sight, out of mind” is a feasible solution for elected officials, then perhaps people who can display more reason and human compassion deserve a turn.

Apply for Payday Loans here!

Image by flickr

The Center for Disease Control has issued warnings for people on the Eastern seaboard to watch out for a large shipment of recalled beef, as up to over a half a million pounds of ground beef have been found to be contaminated with E. coli.  The infected beef was produced and shipped by Fairbanks Farms, of Ashville, New York.  The company has issued a recall of almost 546,000 pounds of fresh ground beef; a recall this large costs more than a personal loan or two.

Up to 28 people may have been made ill

As of today, up to 28 people may have been sickened from eating said contaminated beef.  16 have been hospitalized and so far, 2 have died.  Both fatalities had underlying conditions and complications which were instrumental in their passing.  18 of the suspected infections are in New England, and all but 3 are in the Northeast.  The beef was distributed in Maryland, Massachusetts, North Carolina, New Jersey, New York, Pennsylvania, and Virginia.  It was sold in Trader Joe’s, Lancaster, Wild Harvest, Shaw’s, BJ’s, Ford Brothers and Giant stores.  Consumers living in the Northeast are cautioned to find any packages bearing the label “EST. 492.” It won’t be sold as fresh any more, as the expiration dates were listed as at the end of September.  Here is a link to a  full list of products that contained the contaminated product.

E. Coli is a nasty bug – a paradoxical bacteria

E. Coli, or under the full title, Escherichia coli, is a common bacteria, and it’s one you already have – it’s kind of necessary.  It’s one of the bacteria that lives in the human digestive tract, and you probably wouldn’t survive long without it.  However, the strain that is endemic to humans isn’t the one endemic to cows.  The bovine strain is toxic to humans, and uncooked or contaminated beef can cause havoc.  The most common form that people get sick from is O157:H7 E. Coli (from Wikipedia) called the “hamburger” bacteria, as that’s the common source of infection.  It can cause anything from gastroenteritis (the “stomach flu”) to bloody diarrhea, in severe cases, kidney failure and in 2 to 7% of cases, haemolytic uremic syndrome, which can lead to kidney failure.  The very young, very old, and the immune-compromised are more susceptible to this complication – as they are more susceptible to other diseases like influenza. E.coli can be acquired from meat, unpasteurized milk, swimming in contaminated water, or eating contaminated uncooked vegetables  (it gets into the environment from the business end of a cow).

Typically, it resolves itself within a few days for most people.  However, there are about 2,000 people hospitalized with it annually, and HUS complications from E.coli infections are responsible for about 60 deaths per year.

Those living in NE might want to check their freezer

People living in New England might be susceptible, so it’s suggested you check your freezer if you think you’re at risk.  A hospital stay will cost you more than a cash advance worth, that’s for sure.

Think this represents the average payday loan company CEO? Think again. Profitability is hardly out of sight, even if it has allowed the industry to grow. (Photo: flickr.com)

Infinite profits earned off the backs of the infinite suffering masses. If you take your news from the multi-colored, sugar-laden toothpaste tube that is the mainstream media, then you believe that the payday loan industry is reaping massive profits while those who crawl about on their bellies are drowning in six inches of debt. It’s such an affecting image that it resides in some nether-region beyond belief. In other words, don’t buy the hype.

Payday loan companies aren’t a charitable organization, to be sure. They profit from the service they offer to consumers, but as studies like “The Profitability of Payday Loans” by Paige Skiba of Vanderbilt University Law School and Jeremy Tobacman of Oxford University indicate, the profits derived from interest are very much in line with those taken by more “traditional” lending institutions.

Short-Term Liquidity Has its Price

That’s exactly what payday loans and similar forms of short term loans provide. Their convenient immediacy (sans an extensive battery of credit and background checks) presents a certain amount of risk for lenders, so price protection is understandable. Skiba and Tobacman use financial data from the Center for Research in Security Prices (CRSP) and SEC filings, as well as loan data from several major payday loan companies.

While the most expensive payday lenders charge what amounts to over 1,000 percent APR (somewhat moot; payday lenders typically charge 12 to 20 percent for two- to four-week loans), the authors find that “lenders’ firm-level returns differ little from typical financial returns.” The implication here is that on a per-loan and per-store basis, the payday loan industry experiences high costs that bite into their “profits.”

Methodology of the Study

The authors examine the CRSP and SEC numbers for seven First we summarize publicly available, firm-level profitability data from CRSP and SEC filings. They find average returns of 10 to 25 percent each year in profit. That’s on a per-firm level.

On the individual level, it is observed that loans are generally small, yielding a meager $49 in interest on average. Yet five percent loss ratios eat up more than one quarter of that interest. Net returns (interest minus defaults) amount “in expectation over all of the marginal borrower’s loans to only about $100,” find the authors. Payday lenders, then, would appear to exist in a highly competitive environment where per-loan and per-store costs are indeed large when compared with interest earnings.

Firm-Level Profits

According to the data, payday lenders have performed well on average, earning 10.1 percent profit. Yet because returns have been volatile, the Sharpe ratio (of excess return) is close to zero. Stock data has revealed little indication of excess dividends and SEC 10-K and 10-Q show only “moderate” return on equity, find the authors. Looking at the data of the payday loan firms involved in the study and comparing their returns against those of companies in the S&P 500, the authors once again find that there is “a profile of firm-level profits that fails to approach annualized payday loan interest rates.”

It should be noted that government regulation of the payday loan industry, particularly the September 2006 Talent-Nelson Amendment cap on lending to active-duty military, have impacted firm-level large risk premiums, to the point where the FDIC even released a report (http://www.fdic.gov/regulations/safety/payday/) suggesting that the “unusual risk” accepted by payday lenders justifies the interest and suggests ways payday loan companies can effectively handle this risk.

Individual-Level Profits

How does interest as high as 7,295 percent (the highest instance in the authors’ study) per year lead to only a 10 percent equity return? The authors look at individual-level data for payday loan origination, repayment and instances of customer defaults. The authors determine a mean payday loan size of $283 and median of $269. Eighteen percent interest leads to average revenue of $49 per payday loan, but once losses are taken into account, the story changes. The authors observed that approximately nine percent of post-dated collateral checks bounce. Collections were found to be pursued internally for 60 days, during which time the lenders collected on about half.

Credit standards tell an important tale as well. The better the short term loan applicant’s credit score, the greater revenues payday lenders derive. The authors find that “the intercept of the best-fitting line at the credit score threshold is $100.49. Thus, if the industry is competitive, the total economic costs of servicing the marginal borrower equal $100.49.”

Small Money, Big Default

Returns are astronomical in theory only. Stock returns are also observed to be modest for payday lenders. Store-level costs have to play a major role in this. A 2003 study by Jerry Robinson and John Wheeler estimated 40,000 employees in the payday lending industry. Their wages totaled $1.4 billion annually. They also found that total interest revenue for payday loans totaled $4.0 to $4.3 billion in 2002, indicating that employee salaries eat up a significant portion of that (about one-third).

A 2003 study by Michael Stegman and Robert Faris found that while the 2000 per-payday loan outlet profit in North Carolina was $57,999, the capital requirements for these outlets amount to at least $35,606. This doesn’t factor in wage costs, rent, marketing or administrative expenses, but it does include bounced-check fees, screening costs and loan losses.

You begin to see how expensive it is to operate a payday loan business. Flannery and Samolyk (2005) found that store costs and their revenues are related to store age, too. Start-up costs and establishing a clientele are difficult hurdles that have led newer entrants into the payday lending market to consider the online payday loan market.

A Cash Flow Example

Skiba and Tobacman present this hypothetical. Let’s say a payday loan store has $10,000 in capital at the beginning of the year. If risk is loan default risk is eliminated from the equation and 18 percent interest is earned every two weeks, the take would be $739,500 by year’s end. If annual wages amount to $30,000 (paid out every two weeks), that bill would be a large part of the $1,800 in interest income at the beginning of the year. At that time, the store would only early six percent on its capital. The year-end result would be an annual net of 2,150 percent, which is profitable but hardly extortionary.

So Someone Thinks Payday Lenders Should Only Charge by Cost?

Critics want a flat fee for payday loans – regardless of loan size – but the truth is that so many cost variables exist such as the cost of firms to originate payday loans that per-store differences in fees charged are necessary. Considering the explosive growth within the industry (200 stores observed in 1990 according to the authors vs. 30,000 in 2004), which came in no small part due to lobbying, there is both a consumer need for the product and an environment in which they can successfully exist on the subprime market.

Pricing behavior is largely regulated by oversight organizations like the Community Financial Services Association and the Online Lenders’ Association, but businesses that exist outside these member organizations may unfortunately set rates that are far beyond what is necessary. This is where government regulation can help rein in payday loan companies with the most excessive prices (even if this group may be in the minority of the industry), but excessive regulation is not desirable. Stifling market competition and limiting consumer choice are hardly a desirable alternative.

Image from Flickr.

The ridiculously high national unemployment rate (9.8 percent) has convinced Congress to consider a bill that would allow people to collect unemployment for an additional 13 weeks. However, an unemployment extension of three months might not be long enough for many people.

CNN Money reports that the job market will get better — in a year or so. Actually, the forecast says it won’t be until summer of 2012 that employment is back up to normal rates. Though people are starting to apply for auto loans again and spend a little more, the unemployment situation is not getting any better, and in many places it is actually getting worse.

How do they know?

The recession is crawling to an end as reports show the economy actually grew last quarter. Still, it’ll be a long time before there are enough jobs to go around. CNN explains:

Jobs are what are known as a trailing or lagging indicator, meaning that they change in response to other economic events, rather than predicting changes the way a leading indicator, such as the stock market, does. That’s because even after a recession has ended, employers are slow to add staff until they’re sure that demand has returned.

The article from CNN also points out that the last two recessions we’ve had were followed by a “jobless recover,” and this one probably will be, too.

When is unemployment extension vote?

Though the unemployment extension legislation has already passed the House, there is not a vote scheduled for the Senate yet, which is bad news for people whose benefits will be running out soon.

The length of time a person can collect unemployment is different in different states, but anyone who is on unemployment right now most likely will not be able to continue collecting their checks until the summer of 2012, even if Congress does pass the unemployment extension.

Installment loans have been there for people from all walks of life who have been failed by the traditional credit and lending system. (Photo: flickr.com)

You’ve more than likely heard the call to arms “Stimulate the economy!” before. It takes expenditure in order to keep the wheels of commerce flowing. While the current recession has made that difficult – people are still highly unwilling to spend on non-essential purchases – the standard progression in America has been that accumulation of household debt can be just the grease needed to lubricate the economic wheels.

Of course, access to credit is a very large first step toward accumulating the managed debt and consumerist desire that creates the consistent cash infusion the American economy requires. But what happens when traditional credit is unavailable?

For large segments of the American population, being denied for traditional credit has forced them to consider other options like installment loans. The reason for these denials, according to researchers like Christian Weller of the University of Massachusetts and Center for American Progress, are multiple.

However, concepts of race and ethnicity may indeed be a determinant. In his study “Credit Access, the Costs of Credit and Credit Market Discrimination,” Weller considers household debt information in an effort to determine whether discrimination in the consumer credit market has declined, gone away or actually persisted as deregulation of credit industries has occurred. The survey referenced is the Survey of Consumer Finances (SCF), which the Federal Reserve conducts on a tri-annual basis.

Borrow to Spend, Spend to Stimulate

As families borrow, more of them can afford to undertake major purchases like homes, cars and education than otherwise. Consumer credit such as installment loans also help smooth over financial shocks that come about due to medical emergencies and other situations. If the playing field were level, it would indeed be that simple.

Yet Weller acknowledges what we all know: families don’t all have the same access to consumer credit. Demographics, minority status and income levels have contributed toward lessened chances to obtain a loan and high loan costs. Weller identifies this as “credit market discrimination.”

Restricting access to traditional loans on the basis of race, ethnicity or other personal traits yet not providing sufficient access to some form of installment loan credit when consumer need is imminent has been a failing of the traditional banking industry. As deregulation began in the late 1970s and grew to fruition in the 1990s, the message became clear: America’s economy was on track for more market competition and less discrimination.

Payday loans and installment loans filled consumer need, promoted competition (an invitation banks still haven’t taken up in earnest) and turned back some of the tide of discrimination.

Measuring the Credit Market

Weller analyzes evidence of financial constraints from the years 1989 through 2004. Looking at a sampling of borrowing families, demographic characteristics like family size, marital status, living arrangement and others are considered. Financial indicators like credit history, family income and accumulated wealth are also potential factors, although some of Weller’s findings indicate a “taste-based” form of discrimination based upon prejudicial perception may play a role. Sometimes this is even a more socio-economic form of discrimination, where those of higher income judge those with less negatively.

Consulting Professionals in Times of Financial Insecurity

When consumers face financial stress and don’t have the liquid assets on hand to absorb their financial shocks, seeking out assistance is wise. Among those surveyed by Weller, however, we see that consumers in need of aid don’t always do this. Not only that, but a disparity appears to exist along racial lines. The percentage of Caucasians who relied on financial professionals in 2004 was 45.7 percent, compared with only 27.7 percent of African–Americans and 27.2 percent of Hispanic consumers. Those families who did rely on professional assistance were found to be 17.3 percent less likely to be denied for a traditional loan.

On a related note, the rate of those who applied for traditional loans but were denied also bears a connection to race. Weller found that African–Americans were 41.7 percent more likely than Caucasians to be denied a loan. This difference became even larger when larger-scale loans like home mortgages were considered. The author cites a 1996 study by Jonathan Crook, which suggests that lower-income and older families were also more likely to experience denial on traditional loans.

Negative Expectations

Weller found that 14.9 percent of African-American families and 11.9 percent of Hispanic families claimed that that rather than experiencing a denial, they didn’t even apply for a loan because they figured they’d be turned down. Among Caucasian families, this figure was only 4.9 percent. Low versus high income levels showed a similar order. Tracking these figures from the beginning of the study period in 1989 to the end in 2004, loan denial and application discouragement increased.

For those groups who experienced the greater traditional loan denial or discouragement, Weller finds that short term consumer loans like installment loans tended to be more prevalent. In 2004, 18.2 percent of African-Americans respondents used installment loans, while 10.5 percent of Caucasians and 10.9 percent of Hispanic families. While critics of the installment loan industry would point to some of the short term consumer loan products a small number of credit unions across America offer, Weller found that only 3.6 percent of all consumer debt in the survey originated with credit unions.

An Important Distinction

Weller found that even though minority groups borrowed less from traditional lenders, which did not mean that they were significantly more likely to borrow from sources like installment loan companies or rely upon credit cards. “There is no statistically significant difference by race and ethnicity when it comes to borrowing from consumer lenders,” writes Weller. “The combination of these results with the ones on traditional banks is consistent with the earlier finding that denied and discouraged applications are larger for minorities.” The common conclusion here is that minority families in the survey had restricted access to credit when compared with Caucasian families. Low- versus high-income showed a similar breakdown.

Installment Loans are an Answer

Used responsibly, installment loans can enable any consumer to handle the financial shocks that life inevitably will throw your way. The credit restrictions that have existed in various segments of American society have necessitated the need for short term consumer credit, and products like payday loans and installment loans have filled the need. If consumers are going to partake of whatever source is available when the need is great, then the presence of a regulated industry that saves consumers from highly negative alternatives.

Thus, installment loans fill a need; they do not target groups in need. Claims of “aggressive advertising” would seem to apply more to traditional lenders, as their advertisements are much more prevalent than anything the payday loan and installment loan industry offers. I base this on my own observation, but I’m convinced it is accurate.

Weller’s suggestion that further study is needed as to why such a disconnect exists between minority and low-income groups and traditional banks is an interesting suggestion that could possibly help to close the gap and create more of the competition that fuels the American economy.

Credit counseling and a debt management plan can lead to greater peace of mind for consumers in a bind, but proper education is needed first. (Photo: picasaweb.google.com)

When a consumer enters into credit counseling, a common element of any program is what’s called the debt management plan (or DMP). In a DMP, the consumer agrees to make a set monthly payment to their credit counseling agency. Those funds are in turn used by the credit counseling agency to repay the debtor’s bills, loans and other debts according to a schedule made with the creditors. The presence of the credit counseling agency in the transaction may persuade the creditors to be amenable to lowering interest rates or waiving fees, not to mention staunching the flow of credit collection calls the consumer had been receiving. Provided that something more than free counseling but less than bankruptcy filing is needed, a DMP can be a useful tool in protecting a consumer’s financial interests and helping them to move forward and repair credit.

Benefitting the Consumer

A 2008 study entitled “Completing Debt Management Plans in Credit Counseling: An Application of the Theory of Planned Behavior” by Jing Jian Xiao of the University of Rhode Island and Jiayun Wu of the University of Arizona tenders that the most ideal arrangement for a DMP would be one in which consumers were fully informed of their options and chose the most appropriate course of financial action. At the same time, creditors and credit counseling services alike would deal with the consumer in an ethical, professional manner.

While circumstances surrounding a consumer’s financial troubles rarely fall into place like clockwork, numerous recent studies have shown that consumers who participate in DMPs show ” a significantly lower incidence of bankruptcy over the two years following counseling” (Staten & Barron from 2006). Overall, consumer financial well-being has been observed to improve.

Xiao and Wu Study the Link between Attitude and Behavior

In other words, they apply the theory of planned behavior. Consumers’ attitudes toward credit counseling (and the DMP in particular) are important, as the theory hypothesizes that these attitudes will accurately predict future credit behavior. Xiao and Wu study survey and plan completion information from DMP-enrolled consumers in order to go where studies in the field have never been before. While previous studies have attempted to shed some light on the desires and behaviors of consumers who participate in credit counseling, they relied almost solely upon survey data. Xiao and Wu’s use of the theory of planned behavior to identify factors associated with completing the debt management plan is entirely new in the field, according to the study authors.

Positive Attitude, Intention and Results

The authors begin with the survey data from clients of a national credit counseling agency, and then they apply the theory of planned behavior and other methods from literature on the concept of consumer satisfaction. Their goal is to find the link between a consumer’s intent and their actual behavior when completing their DMP. Their discovery is that observed behaviors consistent with the theory of planned behavior had positive effect on consumer’s intentions, post-credit counseling.

Their Findings Have Implications for Credit Counseling Services

DMPs are understandably a significant monetary resource for credit counseling agencies. Predicting how likely consumers are to complete their DMP would hence be useful to the financial stability of such companies. Positive attitude toward completing a DMP plays a very important rule in a consumer’s future intent. It’s much more significant to ask someone “What do you think about completing the debt management plan?” versus “What do you think about the debt management plan?” Thus, the way in which credit counseling agencies approach the matter with their clients can definitely steer them toward more likely completion, which in turn could foster positive attitudes that reflect in how such credit counseling agencies are perceived by consumers.

Help Clients Feel They’re in Control of Debt Management

By providing clients with the necessary information to make informed decisions and periodically updating their progress, credit counseling services can help empower consumers. If said consumers feel as if they’re in greater control of their debt via a well-executed DMP, their instance of intent to complete the DMP is found by the authors to be higher. Greater client satisfaction is central to credit counseling success, which would indicate that if the agencies consistently treated clients with respect, there would tend to be positive result. Meeting consumer need and even exceeding expectations – a good recipe for any business transaction – leads to a greater likelihood of DMP completion. This is beneficial to all parties involved, from the client to the credit counseling agency to creditors.

What Can Educators Take From Xiao and Wu’s Study?

Determining a credit counseling client’s behavioral intention comes down to two factors, say the authors: “Attitude toward the behavior and perceived behavioral control.” When developing programs to promote positive behavior development, educators should consider directing subject attention to attitude toward the desired behavior as well as the method used to promote behavior (in this case, the DMP). Clear benefits and consequences of DMP completion should thus be made available to credit counseling clients. If such information is made available as a part of a financial education curriculum, the authors feel that consumers could possibly have a more favorable attitude toward DMPs should they ever have the need. Possible psychological barriers could be lessened.

Knowledge: the Key to Positive Attitude and Intent

Xiao and Wu findings suggest that if a consumer in credit counseling finds a DMP that best suits their needs, satisfaction levels can be significantly high. Education as to what the programs entail is most important. In order for consumers to have the optimal attitudes toward DMP usage, they also need to be aware of other options available within the credit counseling industry. Knowledge leads to well-informed choices and greater satisfaction, per the authors’ findings. It should be noted that another important part of a consumer’s financial education should include how to avoid marketing scams, as some segments of society view credit counseling and debt management plans with negative or exploitative. There are many reputable credit counseling agencies that would benefit from heightened consumer awareness.

Feel like the government is rolling the dice when it comes to debt relief? Don't forget how much must be factored in! (Photo: flickr.com)

The global recession continues to batter our financial shores, and world governments are working non-stop to implement programs designed to restore the financial viability of borrowers and promote debt relief. There are numerous theories regarding just how government should go about assisting populations as they progress toward debt relief. Whether their action should be a) measured and look toward long-term stability or b) immediate in order to quell the pain the general population is facing and jump-start the economy through multi-billion dollar stimulus is being debated across the globe.

A June 2009 study by Luc Laeven and Thomas Laryea of the International Monetary Fund entitled “Principles of Household Debt Restructuring” states that any government-sponsored program to promote debt relief should help individual borrowers while at the same time minimizing fiscal cost, reducing the possibility that banks will fail and establishing the a clear plan for real recovery. Unfortunately, it is unclear for nations like the United States whether such a clear plan is in place.

What Should the Structure of Government Aid Be?

Laeven and Laryea suggest the following framework:

• Clear Objective: Troubled loans (bad debt) must be converted. Debt service requirements might be reduced for some borrowers who are suffering due to interest or currency exchange rate explosion.
• Scope of Debt Relief: Helping those who cannot satisfy their debt but would likely be able if debt restructuring were to occur. The criteria for choosing such borrowers would be difficult, and would have to be feasible within the envelope of public funds received to operate the debt relief program.
• It Must be Proportional: Bring the greatest aid to those who are in the greatest need.
• Voluntary Participation: Banks should not be forced to restructure borrower debt, as this will give rise to legal challenges that will hinder the debt relief process.
• It Must be Simple: Household debt involves a large sample of loans, so simple rules are needed if systemic abuse is to be avoided. The government and banks must share information in order to conduct analysis of debt load.
• There Must be Transparency and Accountability: President Obama promised transparency during his tenure. This kind of openness is essential in order to perform the analysis necessary for debt relief using public funds. All organizations involved should know where the money is going, and if a mistake is made or there is an intentional infraction, those responsible should be required to stand accountable.

Unsustainable Debt Requires Swift but Sure Action

The world financial crisis has hit many countries hard. Household debts on the individual level (as well as the ability to service such problems) create a downward spiral from which it is difficult to escape toward debt relief. Financial institutions reel in the face of consumer financial paralysis, as their own balance sheets will with non-performing loans. As a result, banks tighten the rains on available credit, which in turn affects housing prices and the value of other assets. This lessening of collateral value comes back to hit households where it hurts. Consumption goes way down, which hurts retail and leads to unemployment. Greater unemployment contributes mightily to slackening income figures.

Turn Frowns Upside Down? How?

How will society effectively deal with the massive volume of distressed loans? Government involvement will necessarily bring costs; what we have to decide is whether the benefit of their involvement in debt relief outweighs said costs. Any government spending to affect debt relief should be tempered by the need to remain fiscally responsible, suggest the study authors.

The rise in personal bankruptcies and foreclosures presents an important hurdle for government involvement in debt relief. Working each case out individually through the court system is hardly efficient. A gridlocked system based on allowing the market to correct itself – while legal fees mount – suggests in the minds of the authors that a more organized debt relief approach from world governments is necessary.

Is Government Debt Relief Feasible or Credible?

This is an interesting question. If intervention can produce real gains in helping to alleviate public debt without abusing the will of taxpayers, perhaps governments should move forward. The study authors remind us that if debts are written down in value, banks will need their own recapitalization programs in place. These programs should be tuned toward establishing solvency for the financial institutions, rather than gross profits.

The Case-By-Case Approach

If government agencies can assess the current size of the financial problem they face by determining

• An accurate, current picture
• The problem’s evolution to this point
• How the financial burden has been concentrated across a sample of individual banks
• How debt relief via restructuring will help these lending institutions,

then Laeven and Laryea figure that the path for government involvement would be open.

The approach to the problem should advisably first focus on case-by-case debt relief (when numbers make such an approach feasible). Dealing with household insolvency through a framework that addresses collection enforcement, the value of collateral after debt is secured, loan modification that respects the capacity for debtors to pay and (in some cases) debt relief via discharge after a liquidation period. While this framework would address legal issues, the authors suggest that governments could also offer incentives and make loan restructuring easier by promoting such things as nonbinding private sector guidelines for the restructuring process.

Across-the-Board Government Subsidies

When a case-by-case approach isn’t feasible, the authors suggest government-sponsored debt restructuring for debt relief. This would involve direct financial support to debtors. Some or all loans could be covered, where the government would give funds to banks that agree to restructure loans. The creation of asset management companies that buy and resolve bad debt would be another approach. In addition, household subsidies along the lines of debt forgiveness or interest rate/tax rebates are options under this plan.

Ideally, only those who are honestly unable to repay their debt could take advantage of such across-the-board government debt relief programs. Determining a person’s ability to pay is tricky business. “Debt restructuring,” write the authors, “should not be regarded as an instrument that can displace sound macroeconomic policies.” Caution and close study would be needed.

A Restructuring Plan

This would include a variety of incentives and reforms, claim the authors. It begins with incentives for borrowers, where they are encouraged to restructure their loans with a series of subsidies. There would be subsidized refinancing, write-offs and insurance against being harmed by exchange or interest rate hikes in the future. In the area of bad mortgages, the authors state that shared appreciation mortgages might be one way to go. Repayment would then necessarily be related to the value of a home when it is sold. These mortgages could be written so that governments could share in the upside as value appreciates.

Lenders could also receive their share of incentives. Tax credits for those who agree to restructure loans or even access to low interest credit lines as a reward are not out of the realm of possibility in Laeven and Laryea’s plan. To help prevent an endless chain of recapitalization aid, the government could also create “an effective personal bankruptcy framework for addressing collective enforcement of creditor claims and rehabilitation of debtors.” Helping borrowers in that case could also help lenders.

Foreign Currency Loans

Considering that the authors compiled their study for the International Monetary Fund, it comes as no surprise that the issue of foreign currency loans is addressed. They suggest such loans could be converted to local currency, and when the exchange rate problem becomes too prohibitive, liquid assets denominated in the original currency could help make up the difference.

And as a Last Resort…

When the above measures aren’t enough, the authors believe that a new standard for modifying bad loans is needed, as well as temporary bans on foreclosure and repayment. Governments who delve into these areas do so at their peril, however, as lending contracts are superseded. The market could begin to view contract enforcement capability in a negative light, which would diminish investor confidence. In that instance, debt relief is not procured and incentives to default are unintentionally created because the danger of penalty is not so near.

Debt Relief Through Asset Management Companies

Of the ideas Laeven and Laryea present, debt relief through the use of asset management companies has the most promise in my eyes. Such companies would be better equipped to resolve bad debt than the already overtaxed lenders who require recapitalization. Then, on a case-by-case basis with banks, the government can be more selective as to where taxpayer dollars go to help. The relative strength of a financial would be taken into account.

Various Countries are Applying Variants of These Ideas

However, there is no one solution that works for all nations. Debt relief is necessarily a long, slow process, one that individuals may not be able to stomach as they stare down their monthly slate of bills to pay. But for lasting change, it appears that slow reform may be the only route for true debt relief.

(Photo: picasaweb.google.com)

If you’re in the market for a new or used car or wondering if there’s a way to lower your monthly payments on the car you own now, check out the new Car Deal Expert website. It’s a great resource for anyone who owns a car or is thinking about buying one – and that’s a lot of people. Car Deal Expert can save you thousands of dollars by helping you find the very best car loan available.

A full-service site

Car Deal Expert offers a full range of financial services for car buyers and car owners. In addition to great deals on new-car loans, used-car financing, and auto refinancing, you’ll find expert answers to all kinds of automobile-related questions. Should you purchase an extended warranty? How much of your income should you spend on a car? What’s the best way to finance an RV? Can you save money by refinancing your car loan? How does a loan pre-approval affect your negotiating power with car dealerships? Can you get a car loan without good credit?

No hassle, no obligation

At Car Deal Expert, the entire loan-approval process is done online. All you do is fill out one short application and Car Deal Expert does all the legwork for you. Within minutes, you’ll be in contact with a lender offering the best available terms for your individual situation. There’s no waiting or worrying or hassling. And there’s no obligation, either. Car Deal Expert will find you a reputable lender very quickly, but whether you agree to the terms offered is completely up to you.

Improved bargaining power

Getting a quick loan pre-approval on the Car Deal Expert site before you go out to buy a car can save you a lot of headache and trouble, not to mention money. If nothing else, when you’ve already been approved for a loan, you’ll know whether the financing offered by the dealer is fair. And when you walk into a vehicle showroom with a pre-approval in hand, salespeople are less inclined to persuade you to spend more than your stated limit.

Lower interest rates

When you apply for a loan through a car dealership, you may not be offered the lowest interest rate available because higher interest rates can mean higher sales commissions. But when you apply at Car Deal Expert, you will be matched with a lender offering the lowest interest rate available, or a choice of lenders offering various rates and loan terms, depending on your circumstances.

New-car loans. Buying a new car is one of the most important investment decisions most of us will ever make. But too often, people get so excited about the car that they don’t bother to shop for a loan. Instead, they walk into the dealership and blindly accept whatever financing the dealer offers. Many online lenders have better interest rates and more favorable loan terms than dealerships do. So before you go out to buy a new car, take just a few minutes to find out how much you can save by getting a loan pre-approval through Car Deal Expert.

Used-car loans. New-car prices have risen steadily over the years, and used-car prices have kept pace. Used-car financing has become commonplace, and today, if purchase a vehicle that’s only one or two years old, your payments will be nearly as high as a new-car loan. New or used, buying a car is a huge undertaking, and it makes good sense to shop carefully for the best possible loan.

Auto refinancing. If you bought your car when interest rates were high or if you accepted dealer financing without shopping around for better deals, paying off your existing car loan with a new lower-interest loan can save you thousands of dollars. If you bought your car before you had established credit and you’ve been making your payments regularly for a couple of years, you might be able to qualify for a lower interest rate now. If you’ve been working on improving your credit score and you’re still paying on an auto loan, there’s no reason to wait until the next time you buy a car to get a better interest rate. By refinancing your vehicle, you may be able to save money every month, starting right now.

Moving on

The past few years have been economic nightmares for lots of people, but that doesn’t change the fact that most people still need cars just to get to and from work. Lots of people today are afraid to apply for a vehicle loan because of damaged credit scores resulting from the loss of a home or job. But buying a car and making regular payments on the loan can help repair the damage done. If you’re lucky enough to be back on your feet with a job, making car-loan payments like clockwork can do your credit score a world of good.

Getting an answer

There’s a comforting anonymity in applying online for a loan at Car Deal Expert. If you don’t qualify, at least you have an answer, and no one’s going to know but you. But if you don’t apply, you’ll never know; and if you do apply, you just might be pleasantly surprised. Best of all, if you qualify for a loan through Car Deal Expert, you can rest assured you’re being offered the best terms available.

What's a government small dollar loan worth? Nothing more than eagle food, apparently… (Photo: wikipedia.org)

The payday loan industry continues to fulfill the needs of consumers, particularly during the tight times of the recession. On volume, payday lenders are able to make profits that allow them to continue to operate in the majority of states. Thus, the relationship between consumers and payday loan businesses is mutually beneficial.

Now the Government in On the Deal

Did you know the FDIC recently rolled out a Small-Dollar Loan Pilot Program? They’re currently in the middle of a two-year run where they’re studying how traditional banks can offer payday loans at a profit. They’re doing this ostensibly to create an alternative to what payday loan companies offer – and as an alternative to overdraft protection, they claim – but it doesn’t appear they have a strong concept of the difference between black and red ink.

But Profitability is not the “Primary Goal”

Yes, because FDIC and associated banks are such benevolent organizations. Their hearts bleed for consumers, so much so that they use their tax dollars to loan to others without the goal of profitability! According to the Payday Loan Industry Blog, the FDIC Small-Dollar Loan Pilot Program is designed to foster long-term relationships in the communities in which its affiliate banks operate. All because they want to get good marks from those in charge of the Community Reinvestment Act. That means ACORN will be involved, folks. Do we really want to give THEM more of our tax dollars? For all the good they do, their mismanagement and ties to the subprime mortgage mess make them a questionable recipient of our money.

Banks Look Out for Their Interests

Since the bank stands to make so much more with their overdraft programs and there’s no profit to be had with the FDIC’s small loan program as it’s currently configured (more on that in a moment), how long do you think this “community outreach” effort will continue. Not long, I’d wager.

Here are the program features the FDIC has instructed banks to trumpet:

• Consumers may borrow up to $1,000
• Consumers can repay beyond one paycheck cycle
• APRs below 36 percent (we know this isn’t profitable)
• Origination fees that are low or non-existent
• Efficient underwriting
• Applications are processed quickly
• Consumer must have a savings account at that bank (A-ha! But not all participating banks required this.)
• Customers will have access to financial education (Read: Sales pitch for overdraft protection)

Banks Claim They’ll Generate Profit by Volume

Oh really? Is the FDIC going to infuse you with Monopoly money? Because if the small dollar loans operate at a loss, how does that generate profit in the long term? The Payday Loan Industry Blog nails it on the head. By “reaching out” to the community, banks will be appeasing the Center for Responsible Lending (which can easily be traced back or connected to ACORN and the Community Reinvestment Act, by the way). They’ll also have plenty of time to sell consumers over to their more lucrative products like overdraft and NSF fees. Or, if this is a war of attrition, they’ll keep taking a loss until they’ve run their competition – payday loan companies – out of business. Perfectly underhanded capitalism we have there, correct?

What about Overdraft and NSF Fees?

I’m glad you asked. According to Bankrate.com, the national average for NSF penalty fees is $24.46 at banks. A recent study by Moebs Services found that these NSF fees are responsible for 18 percent of banks’ net operating income. That number shoots up to 60 percent for credit unions in Moebs’ study. Take a look at this study by George Mason University’s Executive Director of the Statistical Assessment Service, Donald Rieck. Banks should hate the payday lending industry a great deal.

Customers Prefer the Standard Payday Loan Market

And the FDIC already knows this. Apparently Citizens’ Trust Bank attempted to run a military loans program similar to Small-Dollar Loan Pilot Program in 2008, but they had few applicants and even fewer accepted customers. Reports indicate that the originators of the program felt it was “hampered” by competition (payday loan companies). Citizens’ Trust and their “Community Relief Loan” only drew 574 applications and funded 81 loans (14 percent approval) in the first two months of the program.

Why Only 574 People?

Considering that Citizens’ Trust utilized multiple advertising avenues to promote the program, why were there so few applicants? According to the Payday Loan Industry Blog, it’s because the list of hoops customers had to jump through to actually receive money was prohibitive. From a $48 origination fee, FICO and residency duration requirements to a convoluted system of approval and a requirement (at some branches) that customers have a savings account at that bank, customers had to clear too many hurdles before they could receive funds. With payday loan companies, screening through Teletrack and similar systems is much quicker, while maintaining risk management for the lender.

Payday Lenders Don’t Need Government Subsidies

While the FDIC is convinced that funneling taxpayer dollars into banks so they can offer small-dollar loans is a good idea, it seems clear that their pricing model is completely out of left field. If banks are looking to eliminate competition via a war of attrition – if what’s best for the consumer has nothing to do with it – then taxpayers should protest what the FDIC is doing with their money.  All the FDIC would truly have to do is interview customers at participating banks to see that payday loans from outside sources are quick and convenient, which is why people come back for more. The more bureaucracy that’s added to the process, the fewer consumers will be willing to get involved. A payday loan is simple; government subsidies (with our money, mind you) and convoluted approvals processes are not.

The Life Expectancy Calculator tells you the same things your doctor would, but it's free. Image from Flikr.

The idea that babies born today will end up living to 100 is becoming a popular theory as advances in health education and medical care increase life expectancy. The Living to 100 Life Expectancy Calculator at livingto100.com supports the theory that with the right lifestyle and habits, anyone can end up living to 100.

I wasn’t sure if I liked the idea of the Life Expectancy Calculator at first. I am one of those people who always answers “no” to questions involving knowing when I am going to die. But I decided to check it out.

What is the Life Expectancy Calculator?

The Living to 100 Life Expectancy Calculator asks 40 health-related questions regarding your exercise, sleep and nutrition habits. While I was taking the test, I realized the questions really are just a list of things you can do to stay healthy. I knew what all of the answers were supposed to be. Perhaps if I get debt settlement relief, I’ll be able to give a better answer about the amount of stress in my life.

I knew that if I answered “great!” to the question of how well I sleep I’d get a “higher score” or a longer life expectancy than if I told the truth, “it varies.” So answering the questions for the Life Expectancy Calculator is really a good reminder of which habits are contributing to our health or damaging it. And, of course, not answering the questions accurately really doesn’t do anyone any favors.

Surprising results

Even though I felt that my answers to most of the questions on the Living to 100 Life Expectancy Calculator were not ideal, I still ended up having a life expectancy of 87. I thought that was a pretty good. I could deal with living to 87. However, before you find out your actual life expectancy, the Living to 100 web site says what you can do to add more years to your life.

The feedback from the Life Expectancy calculator also stresses the importance of seeing a doctor, flossing your teeth and talks about your body mass index. For me, the Living to 100 Life Expectancy Calculator made me think of a few small, easy steps I can take to increase my life expectancy and thus my current health. So, in the end, really the Living to 100 web site and the Life Expectancy Calculator only encourages healthy habits. And what could be wrong with that?

Many people now avoid the hassle of busy stores during the holiday season by shopping online.

Retail stores have long awaited, prepared for and depended on Black Friday, the day after Thanksgiving, as a huge day for sales — a day that can single-handedly put them in the black. Of course, the Internet is changing the way people do everything nowadays, including shop.

Cyber Monday marks the latest shift in shopping trends. Online retailers already are preparing for Cyber Monday, the Monday after Thanksgiving, and the day when online shoppers kick it into high gear and start their online holiday shopping. Retailers hoping to cash in on this trend will be offering special deals on Cyber Monday.

Black Friday still black

Though Cyber Monday is becoming an increasingly popular day for online retailers to pull in fast cash, Black Friday is a big day for online sales as well. Retailers who want to make the most out of holiday shopping season would be wise to run promotions on both Black Friday and Cyber Monday.

I think it is strange that online shopping gets clustered together, and I wonder why Cyber Monday is the day people pick to do their online shopping. Online retailers operate 24/7, so why wouldn’t people get their shopping done Saturday or Sunday?

Holidays keep businesses alive

Black Friday has long been the make-it-or-break-it day for many retailers. It’s called Black Friday because it’s the day that many retailers end up “in the black” for the year.

That is, retailers begin to make a profit on Black Friday after operating at a loss for most of the year. Basically, end-of-the-year holidays are the sole reason many stores stay business.

Find Cyber Monday deals

Besides being a big moneymaker for online retailers, Cyber Monday is also a web site. You can check out all kinds of deals offered on Cyber Monday and find a plethora of online retailers at CyberMonday.com.

Rather than being a product of impulse or vanity, payday loans are a reflection of consumers' reaction to a harsh economic climate. (Photo: flickr.com)

There currently exists no definitive study of how payday loans are used. Researchers from both sides of the aisle (pro and anti-payday loan interests) are working on it, however. For now, there are studies like “What Do High-Interest Borrowers Do With Their Tax Rebate?” by Marianne Bertrand and Adair Morse of the University of Chicago. They attempt to make sense of the correlation between spending and borrowing habits in relation to the 2008 tax rebate checks. What they find is that there is consistent evidence supporting the idea that the average payday loan user experienced a lessened dependence upon payday loans because of their tax rebate check. In so doing, I suggest that these average payday loan customers are not so impulsive and uneducated as reactionary media would have the masses believe, but reacting to a difficult economic climate in a natural way.

Average and “Temptation” Users

Bertrand and Morse identify different payday loan usage groups, from low to medium use and a smaller high-use group they classify as “temptation” or impulse spenders. While most payday loan customer groups showed a marked decline in the use of payday loans following the appearance of their tax rebate check, the temptation group showed no such decline. The size of this group is marginal compared to the majority in the authors’ survey.

While the temptation group tends to be governed by impulse and use payday loans for non-essential things like large entertainment purchases and vacations, it is significant to note that payday loan users as a whole in the survey did not tend to use their tax rebate check to pay down or “retire” their payday loan debt (only nine percent said they did). They did tend to answer that they were using payday loans to help with regular monthly bills.

Low-to-middle frequency payday loan users (the bulk of those surveyed), are more likely to use payday loans as an infrequent bridge between paydays, absorbing surprise budget gaps. A related study by Shapiro and Slemrod that the authors cite (”Consumer Response to Tax Rebates,” 2003) indicates that this group tends to depend upon credit when their budget is unable to handle financial shocks.

Details of the Study Sample

Here’s how Bertrand and Morse’s study worked. For two weeks they distributed surveys at 70 different payday loan outlets. As added incentive to participate, customers were offered a free one year magazine subscription. In total, the final survey sample included 881 people. Contrary to media rhetoric that the payday loan industry preys on the elderly, the median age of the respondent was 42, and their monthly income averaged $2,257 (around $27,000 annually, which is neither rich nor destitute poverty). Only five percent lacked a high school diploma, while a telling 15 percent lacked a college degree. Thus, the average payday loan customer is educated, which also runs counter to the popular media image of simple people being manipulated by payday lenders for their life savings or something equally ridiculous.

Looking For a Buffer

The authors’ study results appear to indicate that tax refund checks and payday loans play a similar role, although the one-time nature of a tax refund means that the buffer it provides against surprise expenses is temporary. Considering the average appearance of respondent demographics, it could serve to reason that the predominance of those in the survey who claimed they had to depend upon credit of the payday loan nature during emergencies are in fact… average people. They are not an exploited minority or fringe group. The case of temptation spenders – being more aberration than norm in the study – could simply indicate that there will always be a segment of the population governed by impulse rather than genuine need. Such a condition exists among payday loan users, but it is hardly symptomatic. Numerous studies indicate that more extreme financial behavior exists throughout society and is not confined to lower income groups.

Everyday Living and Payday Loans Do Not Mix

Clearly, everyday dependence upon payday loans (such as those observed in the temptation group) is harmful. The temptation group’s habits placed them in a situation where they needed to use their tax refund for staving off catastrophic situations like eviction or utility shutoff. Excessive use of payday loans (just like excessive use of credit cards or other types of consumer loans) could lead to such difficult financial straits. The onus falls upon the consumer (whom studies like Bertrand and Morse’s indicate are generally educated) to correct their behaviors or seek help in doing so. To their credit, reputable payday loan companies are able to steer consumers in the direction of credit counseling, should the need exist.

Borrowing Decisions: A Product of Duress, Not Coercion

The bulk of American society has been under financial duress during the current recession. It’s difficult to argue otherwise. The constraint of one’s shrinking economic reality forces them to make difficult decisions. Bertrand and Morse suggest that while their study tracks spending and borrowing patterns of payday loan customers, what is truly needed is a study that reveals the thought process an individual goes through when facing financial shocks. If it is reasonable to assume that the bulk of those surveyed in the authors’ study – low-to-mid use payday loan customers who are covering for infrequent troubles – correlate into a bulk of American society, then it would seem that this generally educated populace is reacting to harsh conditions. That there is not a permanent reduction in payday loan use observed in either of the surveyed groups would seem to suggest that even after the tax refund check has made its impact, economic environment conditions persist. These are educated people – “average” in age and income – who run into difficult situations. If payday loans can spare them from financial catastrophe, it is not unreasonable to think that they would consider the option.

This Federal Reserve/Vanderbilt/Penn study tries to connect payday loans to credit ruin, but what they leave out suggests a rosier alternative. (Photo: flickr.com)

Credit cards have proven to be both a useful tool in establishing a credit history and a bane to those consumers who hope to maintain a good credit history. The temptation to “swipe and go” has been actively cultivated by the American media. With the magic plastic in hand, consumption is quick and easy. Those who pay off their credit cards each month may escape the revolving interest trap, but the vast majority of credit card users must not pay their balances in full. If they did, why would credit card companies offer reward programs? If consumers weren’t tied into earning points and paying interest fees, the programs wouldn’t be profitable for the companies.

What about Payday Loans?

According to multiple sources, over 10 million U.S. households use payday loans each year. These short-term loans are paid off over a set period of time, typically two weeks’ time. They fulfill a need and are not a swipeable ticket to impulse purchases. Certainly payday loans CAN be used for impulse buys, but lenders make it clear that this is not advisable. Furthermore, the amount available is finite, typically smaller than the credit limit available on a credit card.

Yet Sources Continually Try to Connect Payday Loans to Financial Ruin

Take the January 2009 interdisciplinary study “Payday Loans and Credit Cards: New Liquidity and Credit Scoring Puzzles?” Written by Sumit Agarwal (Federal Reserve Bank of Chicago), Paige Marta Skiba (Vanderbilt University Law School) and Jeremy Tobacman (University of Pennsylvania), this study attempts a statistical correlation between credit card default and payday loan use. In particular, the trio attempts to make the case that consumers consistently make bad decisions by choosing to take out payday loans when they have credit card liquidity.

There must be a reason that consumers make such a choice, however. Agarwal, Skiba and Tobacman do not define such reasons, so I will attempt to fill the crucial gap.

Methodology and Results

Agarwal, Skiba and Tobacman analyze a sample of 102,779 people who took out payday loans from a single lender (this is significant, as I’ll show in a moment) and 143,228 with credit card accounts in states where the same payday loan company operates. They discovered that while credit card issuers used FICO scores as the primary means of determining a consumer’s credit worthiness, the payday lender used Teletrack scores instead, which tend to track borrowing history more on the subprime scale.

According to the study authors, Teletrack scores were eight times more effective at predicting payday loan default than FICO scores. Thus, it can easily be assumed that the more effective credit evaluation device creates more successful payday loan transactions that it would defaults and additional fees. The mainstream media is too often ready to accuse the payday lending industry of wielding such fees like a fire hose on unwitting consumers, but the truth of the matter is much less dramatic.

Payday Loan Customers Have Access to Prime Credit

Even though the authors’ study indicate that on average, consumers who use payday loans have a lower average income compared with those who just use credit cards, the same study indicates that their average FICO score is still in the 620 or slightly lower range. Thus, they can still access prime credit cards.

Why is it then that, as the authors indicate,

Two-thirds of people in the matched samples have at least $1,000 of credit card liquidity on the day they take their first payday loans, much more than the typical $300 payday loan.

It’s an interesting question. A 2001 survey by Elliehausen and Lawrence regarding credit card availability and usage found that 56.5 percent of respondents who used payday loans had bank-issued credit cards with liquidity available, but 61 percent “hadn’t used them in the past year in order to avoid exceeding the cards’ credit limits.”

People Don’t Like to Admit When They Fall to Temptation

The authors show us that there is a steady decline in credit card liquidity leading up to the time when consumers take out payday loans, but the liquidity doesn’t disappear entirely. The authors comment that

This is interesting because it speaks to the question of why people borrow on payday loans. If liquidity were flat until a large drop one month before the payday loan application, we would suspect that a single large bad shock had unexpectedly arrived. Since we find average liquidity falling steadily, impatience, general financial mismanagement or persistent shocks seem more likely explanations.

Perhaps what Agarwal, Skiba and Tobacman define as “impatience” or “financial mismanagement” could include the psychological temptation having a credit card that needn’t be paid off in full each month (advisable, but generally not required). It would be worth studying that factor in greater detail, as I know from first-hand experience that having access to credit, using it and allowing it to revolve month-to-month is an easy trap. In my opinion, such situations are not out of the ordinary. Closer study is warranted.

The Author’s View of Payday Loans is Limited

Obviously, if you only survey financial results based on the clientele of a single payday lending operation, your results will be far from definitive. When the authors claim that credit card holders who take out payday loans are 92 percent more likely to experience credit card delinquency, such a dramatic number indicates to me that the statistical sample is much too small to be meaningful. If consumers evaluated by Teletrack are generally less prone to payday loan defaults, why would credit card defaults be all that different?

It is significant to note here that applying for payday loans does not generally depend upon or impact one’s FICO score. That is one of the major selling points of the product, as consumers with less than perfect credit can take out a payday loan for a set amount when necessary. There is no system of revolving credit at work with payday loans; the balance is paid in full at a set date two weeks in the future. Furthermore, since payday loans obtained after Teletrack reference are generally not recorded in a consumer’s credit history, other lenders cannot use a consumer’s payday loan history against them when they apply for large-scale loans for homes, vehicles, education, etc. If banks could use payday loan information against consumers, they most certainly would. Their track history of penalizing and confusing consumers with credit card terms prompted President Obama to step in with fair credit practice legislation, which in my mind only serves to support my argument that banks will charge whatever they can.

Why Don’t Credit Card Companies Use Teletrack?

You’d think credit card companies would find any subprime information about a consumer to be valuable in their attempts to justify higher rates and limiting practices. The study authors indicate that the reason credit card issuers don’t normally use Teletrack is that the credit bureaus charge them for each credit query. Perhaps the leverage they can glean on a consumer is not valuable enough to counteract the fees?

Temptation Yields to Payday Loans

Considering how much damage a consumer can do to their credit history by allowing revolving interest credit cards to spiral out of control, the set maturity period of payday loans could readily be considered a better option. From a psychological standpoint, not having a tempting credit card in hand when you surf E-commerce sites or drift through the local shopping mall could be advantageous to the consumer. While Agarwal, Skiba and Tobacman have the beginnings of a useful study here, a larger sample of both credit card issuers and payday loan businesses is needed to make a more meaningful assessment of the payday loan’s supposed correlation with credit destruction. Perhaps then consumers can more easily see that the practices of banks who issue credit cards may be the most harmful advice out there. See the video below if you aren’t convinced of that yet…

Related Video:

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