• Some States Pushing for Payday Loan Regulations

  Filed under Payday Loans, Politics
  Feb 12

  It never ceases to amaze me how ignorant some lawmakers can really be. It honestly doesn’t inspire much confidence in our entire legislative system. But here we go again, state legislatures are in session and payday loans are on the chopping block in several of them.

  What I can’t understand is the mindset behind this. Lawmakers feel payday loans are dangerous and hurting people. Well, first time borrowers have a national default rate of about 40%. So 60% of first time payday loan borrowers pay their loan back on the due date without any problem whatsoever. Of repeat borrowers, some states have default rates as low as 12%. That means someone coming back for another payday loan pays it back on the due date just fine 88% of the time.

  With these kinds of statistics, how is anyone justified in thinking these loans are ripping people off? The vast majority of borrowers, first time and repeat together, pay their loan back on the due date just fine. Clearly the issue here doesn’t lie with payday loans, it lies with the borrowers.

  So why do some borrowers default? Typically, they simply borrow too much. They get multiple outstanding loans and dig themselves into a hole of debt that is virtually impossible to crawl out of. Fortunately, law makers already decided that interest stops growing after 12 weeks. So even if you do get in the hole, it won’t keep getting deeper like credit card debt. it stops after three months.

  The funny thing is that legislators are citing extreme, isolated cases in making their arguments. So-and-so had 4 loans for $400 and ended up paying $4,000 back in fees and interest! This is outrageous, they must be banned! This is the kind of rhetoric you would hear during these discussions.

  The truth is that a home mortgage will cost you about 10 times more than a payday loan in interest. If you get a payday loan today and get paid again in two weeks, then you would have a 14 days term. At 365% APR, that means 1% in interest every day. So in 14 days, you end up paying how much in interest? Just 14% of the loan, or if you borrowed $300, you pay back $342.

  Does that sound predatory or dangerous to you? The danger comes in borrowing $300 from 3 different lenders at once when you only make $500 every two weeks. That’s called idiotic borrowing, not predatory lending.

  Look at a home mortgage. Buy a house for $111,000. You put down $11,000 and are left with $100,000 in the loan. If you get a 30 year mortgage for 6% APR, you will end up paying 6% of your balance each year. After 30 years, you will have borrowed $100,000, but paid the bank $216,000! That’s called 116% in interest!

  So let me get this straight, its ok to collect double what you lend as long as it is conveniently spaced out over 30 years? But it’s not ok to collect 14% of what you lend in two weeks? Do politicians think logically?

  Of course not, their lobbyists do all their thinking for them. And guess who has pumped literally millions of dollars into lobbying politicians against payday loans? Banks and credit unions. Why? Because they would love to corner the market on short-term credit. Then they can charge 1000% APR and simply call it a “fee” and not interest and get away with it. We can fall for illogical rhetoric or we can think for ourselves. Hopefully our politicians do the latter.

  Tagged as: Payday Loans
  
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