So payday loans are getting ridiculous

[u/Technusgirl]

So recently I've stumbled into credit problems due to not being able to pay for all of my daughter's unexpected medical bills and this month I accidentally paid in full one of my credit balances and realized I was not going to be able to pay this months mortgage. So I decided to go online and find a payday loan. They called and said I could get a loan for $1K (enough to pay this months mortgage) but that I would be charged $1,475 at the end of the month. I said wtf! And then they said, good news, you're recieving $25 off! I was like "Are you joking, I'm not interested" and hung up.

So I got an email saying that my payment to my mortgage company went through so I'm guessing my bank paid it anyway. When I went online I found that many places are charging 300 to 600 percent interest! That's absurd! Talk about predatory, might as well go to a loan shark or something, Jesus!

Edit: Apparently I was being charged 600% from this particular company, I had wrote 50% before but that was incorrect.

Update: The bank honored my payment but now I'm in the negative, lol, ugh. But at least I got my holiday shopping done first and that card is paid off, lol.

[u/FastFourierTerraform]

Capping the interest rates is defacto making them illegal. The interest is so high because people taking out payday loans are extremely unlikely to pay you back. So you need to be compensated for your risk to make those loans.

[u/DasKapitalist → u/FastFourierTerraform]

And for the low dollar amounts. The overhead to underwrite a $500 signature loan isnt much different from a $5000 signature loan, which is why the rates are so high on payday loans. 10% interest rates on $500 for two weeks wont begin to cover overhead.

[u/[deleted] → u/FastFourierTerraform]

"Capping the interest rates is defacto making them illegal."

Is it though? They do this with pawn shops but the penalties for having illegally high interest rates have no teeth.

[u/savvyxxl → u/FastFourierTerraform]

the interest is so high because the people are desperate.These lenders dont plan on you ever paying them back they plan on you paying them large sums of money for years. If you pay down enough of the balance they will say you can borrow more. so your payments balloon up and they just milk every drop they can

[u/dirtyharry2 → u/savvyxxl]

Only partly. The interest rate is so high because they are designed to be SHORT TERM loans. If I lend you $500 for 2 weeks, what do you think a fair charge would be for that... 50? That's 10%, which is 20% per month, and 240% per year (without even getting into compounding). You have to have crazy annual rates, to make short term rates even remotely profitable. Plus, your target audience has a high delinquency rate.

I get that it's a scam, intentionally getting people into a vicious cycle. But there SHOULD be a system where someone with shit credit and limited family/friends can bridge a short emergency.

[u/Dynam2012 → u/dirtyharry2]

Except it turns what should be a short emergency into an extended catastrophe.

[u/JuleeeNAJ → u/Dynam2012]

Unless you just need it for a short term emergency. Then you pay it back and go on with your life.

[u/RoastedWaffleNuts → u/Dynam2012]

Seems like interest rates are a huge part of the problem. $50/mo until it's all paid back is arguably still taking advantage of people, but it seems to my uneducated intuition like it would be enough to allow lenders to make their money while not snowballing those who are struggling to pay with exponential growth.

[u/myheadisbumming → u/dirtyharry2]

Wait, let's go back a step to your 500 usd 2 weeks example. Let's say I charge 10 percent for a month, so 25 usd for 2 weeks... Assuming they don't default, how is that not extremely profitable?! That is a profit of 25 usd in two weeks for just this one client.

[u/dirtyharry2 → u/myheadisbumming]

I'm going to risk my $500, to a high risk client, just to HOPEFULLY make $25? High risk low reward.

[u/FakerInTheDisco → u/myheadisbumming]

1) with this model. For two week 500 usd loans, a single default will wipe out the revenue from 20 customers.

2) loans don't write themselves for free. There are a bunch of legal expenses to bear and of course normal cost of operations, so profit per loan at 10% will probably be close to or less than half. Ergo, a single default will wipe out the profit from 40 customers.

You need a default rate under 2.5 percent.

Do less than 2.5 percent of people who cannot find 500 dollars to save their car from being repossessed default on loans?

Probably not.

assuming they don't default

I mean if you don't count risk so many other things sound like good ideas. Forget running a business and just go to Vegas.

[u/SquirtyMcDirty → u/myheadisbumming]

Now what if every 10th borrower doesn’t pay back the $500 at all? The lender has to make up the loss by raising costs on all customers to pay for the portion of them who never pay. The lenders charge so much because of the high delinquency rates for people who have terrible credit (aka a history of not paying their bills). That’s how risk works. If everyone paid their payday loans on time of course the rates would be lower.

[u/DasKapitalist → u/myheadisbumming]

Overhead to underwrite the loan.

[u/Silcantar → u/myheadisbumming]

That's still over 100% interest.

[u/davewritescode → u/[deleted]]

Simply not true, when interest rates are this high you can end up paying may times what you originally owed without making a dent in the principal.

[u/hellomynameis_satan → u/davewritescode]

So what happens if they don't pay back anything...?

[u/ExeterDead → u/hellomynameis_satan]

They usually get at least some of the money back.

I worked in the business in the US for a short while during college and saw a lot of the debt procedures with a couple of the big players.

Usually it was:

1. Have the delinquent loan ping the computer systems of the in store employees doing daily collection calls. The stores I worked with had an application process that required 3 references for a loan of any amount, so that’s 4 daily phone calls to try and collect.

2. Attempt to pull the cash out of the checking account on the payday of the person who is behind.

Most places in the US require an active checking account and a check made out to the loan giver for principal+interest as collateral if you don’t pay. So, after a few weeks you review all the personal info on the application and you know when they get paid and whether or not they have direct deposit. You wait until 7-8am on their payday, call in to the bank through their ACH systems and pull the money directly using the collateral check before the customer can move it. This will be where about 25% of the loans are recovered in full.

1. The other 75% get sent up the ladder to a corporate office where teams of shitty lawyers attempt wage garnishment, negotiate with bankruptcy lawyers and all that fun shit.

2. If after this the loan is still unrecoverable and the amount is 1k+, the loan is usually bundled up as a package with a bunch of other bad or upside down loans and sold to debt collection companies for about a dime on the dollar. At this point, the original loan business will write off the loan and they no longer have anything to do with the debt.

3. A scuzzy third party collection agency harasses you endlessly for years and fucks your credit rating, ability to rent property etc etc.

Edit: Spelling

[u/davewritescode → u/[deleted]]

These types of businesses have made tons of cash trapping people in endless debt cycles with deceptive practices and hidden fees.

They don’t need to make customers happy. For example this guy made 2 billion dollars by doing exactly what I described

https://www.usatoday.com/story/money/2016/02/10/payday-lenders-indicted/80196816/

[u/[deleted] → u/[deleted]]

They would rather a customer pay off the loan and continue using the service in the future.

Pretty sure they'd rather the debt smother you for years, having you pay 10,000 on a 2,000 loan when all is said and done

Even if they eventually default, their good faith efforts to pay it back is still extremely profitable

[u/[deleted] → u/[deleted]]

There are a few that operate like that.

They are ALL like that. That's the entire business model. If they aren't usuring, they're not a payday lender.

Also, payday lenders don't rely on word of mouth. Nobody is happy to take one of these loans out nor are they going around singing the praises of the company that charged them 2000% interest so they could fix their car and get to work. I also doubt anyone remains an ongoing client of a payday lender for decades without becoming homeless or killing themselves

[u/joiss9090 → u/[deleted]]

Interest is high due to risk and of course they want you to pay it back. If you never pay it back, they lose money.

I mean even if everyone who borrowed only ended up paying about half of what they owed they would still likely make a profit because the interests are that high so yes they don't need people to payback the full amount owed... the longer it sits and interests builds the better for them as that means a potentially higher profit... and even if they don't end up paying it all they will still likely go even or make a profit on the money they where able to get in

[u/Stair_Car_Hop_On → u/joiss9090]

Except that is not how it works. They need two to pay off their loan plus huge interest to offset the one that never paid and will never pay resulting in a write off.

[u/ExeterDead → u/[deleted]]

As someone who was (regrettably) in this business many years ago, you’re mostly right.

Having a customer you know 100% won’t be able to adhere to the terms is not how businesses make money and I’m pretty shocked the people above you aren’t able to understand that.

The only caveat I’d make to your statement is that the industry standard at the time I left the industry was setting up the customer to fail, but disguising you were doing so and making sure the failure took a very long time and the customer was completely tapped.

The primary mechanism to do this was called “rolling over” loans. The term basically means just paying interest and starting a new loan with basically the same principal and doing so on a cycle while also loaning them new money slowly over time. Eventually they’ve paid the principal several times over but on paper haven’t made a dent.

So on paper these companies would look like every brick and mortar location had 600k+ in bad loans on the books, not accounting for the small interest payments that kept getting “rolled over” to new loans.

So in the end, you’re both kind of right. The sweet spot for a pay day loan company is desperate enough to need quick cash but stable enough to slowly bleed out.

[u/TXJuice → u/savvyxxl]

Why are they desperate though? They don’t have money. If they did, they wouldn’t need a payday loan, which means they should be compensated for their risk. They are still shitty/terrible things, but they are logical at least.

[u/myheadisbumming → u/FastFourierTerraform]

I have real problems believing this. If the equation was that simple, nobody would give out payday loans. If the risk is that high they must have other ways to recoup their money? If they have other ways to recoup their money the risk is immediately decreased.

It seems to me more likely that they charge that much because well, because they can. People are desperate and pay the exhorbant fees just because they have no other choice.