Payday Loan Facts
Who are the industry's opponents?
Opponents of the Payday Lending industry fall into four
main categories: The Uneducated Activist, The Philosophical Opponent,
The Lobbyist, and The Media.
The Uneducated Activist
We believe the vast majority of opponents fall into this
category. They often appear in the form of an activist organization.
They do not understand, nor have they made an attempt to understand,
how the product works or the economics of the business. Consequently,
they believe lenders are "predatory" and out to "exploit
the poor". Their arguments are emotionally-based, and have
neither logic nor fact to support them. They believe payday loans
should be banned, or have their fees capped by government intervention.
The Philosophical Opponent
Although some of these opponents are also uneducated
about the product, some have studied it. They simply believe the
fees are too high and that government should regulate the industry.
This opponent is paid, usually by an activist organization,
to attack payday lenders. Their interests are purely mercenary,
taking advantage of the naivete of the Uneducated Activist, and
they do not care how their actions harm the lenders and their
This opponent is also self-serving. 99% of all newspaper
articles on payday loans are negative. This is because a story
about how a consumer got "trapped by a loan shark" makes
for a better story than how someone was helped by a payday loan.
Who are Payday Lenders?
Of the 22,000 stores in the United States, two-thirds
are independently owned and operated. They are the small businesspeople
of our country -- average American entrepreneurs who have invested
their own money or gotten a bank loan to build a business.
They are young couples in their 30's. They are Southern
businessmen in their 50's. They are ex-military with families
to support. They are black, white, Asian, and Hispanic.
They are, for the most part, NOT fat-cats who make several
million dollars a year.
How Much Money Do Payday Lenders Really Make?
The media and opponents of the industry spend a lot of
time talking about the fees associated with payday loans. But
they never spend any time talking about the costs of running such
Here is a real-world example:
A moderately successful payday loan store that has been
open for a year will have extended about $2 million in loans to
customers. Let's say they're in a state that permits a fee of
$15 per hundred borrowed.
Opponents ignore the fact that, on average, 5% of these
loans will never be repaid despite collections efforts. That means
$100,000 of that $2 million loaned is never returned. Thus, the
lender will only earn money on $1.9 million of loans.
$1.9 million x 15% = $285,000 in total fees
An average store will cost about $10,000 a month to run.
That includes paying employees, utilities, insurance, rent, and
so on. Thus, total store costs for a year will be $120,000.
$285,000 total fees - $120,000 expenses = $165,000 in
But where do you think a payday lender comes up with
$2 million to loan out to people? Where do you think they get
the money to cover their expenses? Many of them take out a loan.
Many would be lucky to get a $500,000 loan at 8%. That means they
are paying $40,000 in interest on that loan per year.
$165,000 store profit - $40,000 interest = $125,000 in
This owner will likely contribute up to $25,000 to his
401 (k) for retirement.
$125,000 net profit - $25,000 retirement = $100,000 in
Now they must pay federal and state income taxes. If
this operator has a 4-person family to support, their taxes will
$100,000 taxable income - $15,000 = $85,000 in take home
In the final tally, $85,000 for a small business owner of one
payday advance store is a very nice annual income, but hardly
the level of wealth opponents claim that payday lenders achieve
Are payday advance fees "too high"?
Opponents often translate a payday advance fee into an
Annual Percentage Rate because 1) the law requires lenders to
do so, and 2) it makes the lender look like they deserve the label
But let's examine how a change in fees affects a payday
lender's business. This is the kind of analysis the Uneducated
Activist has never performed. They look at the fee and then make
a judgment, forgetting that every business has expenses.
Let's use our single-store example from above. Keep the
default rate the same at 5%. If we lower the fee from $15 per
hundred borrowed to $14, this will decrease the lenders revenue
by about 7%. Net profit will decrease 15%. But take home pay will
decrease 44% to $48,000.
Many activists want to see fees cut to $10 per hundred
borrowed, or even lower! In that case, our store owner would be
left with a store profit of $20,000. He can't survive on this,
so he's out of business. Recently, the activist group OurOregon
pressured the state legislature to cut fees to $6.50 per hundred
This will put Oregon payday lenders out of business,
despite the activist group's claims that this legislation allows
payday lenders a "fair profit".
What will happen if payday lenders are put out of business?
Opponents would like you to believe that consumers would
be better off without having access to payday loans. Yet if payday
lenders are run out of business, these same activists never offer
alternatives. Just because payday lenders vanish from a state
does not mean that the demand for short-term emergency cash loans
will vanish as well.
Here are the facts about what will happen if payday lenders
are forced out of business:
1) Lenders may find another way to offer loans.
In Texas, payday lending was essentially outlawed by
FDIC restrictions. The lenders now offer loans under a different
section of the state's Finance Code. Before the FDIC got involved,
consumers were charged about $16 per hundred borrowed. Now, they
are charged $20.
Pennsylvania outlawed payday loans. Now lenders offer
a new product under a different section of the state's laws. This
product is more expensive for consumers, costing $30 per hundred
2) Consumers will get their loans from the internet
A few websites offer low rates for first-time customers.
However, after the initial loan, the fees approach $30 per hundred
borrowed. There is also the added risk of identity theft, because
consumers don't really know who they're dealing with. They may
also have no recourse if the lender is in another state or is
an offshore entity.
3) Consumers will return to bouncing checks, which is
what they did before the payday loan era.
Consumers will write a bad check for each bill they owe,
hoping to pay them off for real when they get their next paycheck.
Unfortunately, each bad check will generate an NSF fee of $25-30
from the bank, and $15-25 from the merchant. That's a $40-55 charge
per bill. As most payday loan consumers have regular bills that
are small in denomination, bouncing checks will be far more expensive
than a single payday loan.
Do payday loans "trap" people in cycles of debt?
Opponents that do not believe in personal responsibility
make this statement. They believe merchants should bear the burden
of protecting customers from the use of the product they sell
which, of course, is impossible. The only person who can control
how someone uses a product is the consumer himself.
Thus, a consumer may trap himself in a cycle of debt
by using a payday loan irresponsibly.
Can you define "irresponsibly"?
The responsible use of a payday loan means using it to
make up for a sudden shortfall of cash. Sometimes that shortfall
may last several weeks. But a payday loan is like any other product
-- it can be used irresponsibly.
Driving while intoxicated is irresponsible. If there
is an accident, what caused it?
The car or the drunk driver?
A parent giving a 3-year-old a toy intended for an 8-year-old
is irresponsible. If the 3-year-old is injured, is it the toy's
fault, or the parent's?
Eating fast food every day is irresponsible. If you become
obese, is it the food's fault, or your fault?
A consumer is using a payday loan irresponsibly if:
1) They aren't sure they can pay it back.
2) They do not alter their budget so they can
pay it back on time.
3) They take out multiple loans.
4) They do not seek alternative ways of meeting
a cash shortfall.
A payday loan does not trap anyone. A consumer traps
himself by using the product irresponsibly.
Do payday lenders "target" or "prey" on
specific demographics or neighborhoods?
The Uneducated Activist does not understand that all
businesses want to be in neighborhoods where they have the best
chance of attracting customers. The Lobbyist uses this statement
to portray lenders as "predatory".
The word "target" is used to make it seem like
lenders have singled out a group of people to attack. The reason
is that activists have already judged payday loans to be "bad",
thus lenders must be "targeting" people.
Here is a quiz. Which of the following businesses has
chosen the right location to do business in?
A BMW dealership in a low-income neighborhood.
A Saks Fifth Avenue in a low-income neighborhood.
An ice cube stand in Alaska.
A Payday Loan store in Beverly Hills.
Payday lenders will place themselves where their product
is more likely to be needed. The people who use payday loans generally
make $20,000 - $60,000 in gross annual income, so they will set
up shop in those neighborhoods.
What about loans to the military?
Military personnel enjoy discounts from businesses such
as Southwest Airlines. We would prefer it if payday lenders could
find ways of making loans available to military personnel at a
substantial discount. Unfortunately, military default rates are
no different than civilian rates, and that makes discounts difficult
to offer and still allow a lender to stay in business.
Pending legislation in California and the U.S. Congress
will cap military rates at 36% APR. On the surface, this is great
for the military. Unfortunately, storefronts that do a majority
of their business near military bases will not be able to make
a profit. They will vanish. Military personnel will be forced
onto the internet to obtain loans, where they will likely face
It is, regrettably, a "Catch-22" with no obvious
remedy in practical terms.
We have expressed our concerns about low military pay
to our representatives in Congress.
We are also exploring ways of offering an inexpensive,
alternative loan product to military personnel via the internet.
Are there "bad" payday lenders?
Yes, but every business has its share of unscrupulous
vendors. Consumers must shop around to find the best proprietors.
We believe that all shop owners should run a business
honestly. An honest businessman can generate more than enough
revenue to be profitable.
Do payday lenders use harassment to collect on defaults?
Some do and some don't. We support lenders that abide
by state and federal guidelines regarding reasonable collection
efforts. Remember, most payday lenders have a vested interest
in keeping their customers. Overzealous collection efforts are
more likely to result in a loss of a customer than getting one
to visit the store again.
Do payday lenders charge usurious interest rates?
The most common attack on payday lenders is that they
are "legal loan sharks" that charge interest rates "in
the hundreds of percent".
Translating the fee for a short-term loan into an APR
is not an accurate way to judge the relative value of the product.
The only reason APR's are even used is because the law requires
it. Few customers consider what the APR of a loan is when making
a decision whether or not to take out a payday loan.
The Fee - APR Argument
Dr. Thomas Lehman, in his article "In Defense of
Payday Lending" notes that customers utilize what is known
as "subjective value" when using a payday advance. Although
an APR disclosure is required, its value is irrelevant to customers.
"The real price signal to which the borrower responds is
the flat fee that is charged to hold the postdated check. There
is no such thing as an "excessively high" fee. It is
entirely subjective to each voluntary participant in the transaction."
The decision of whether or not to take out a payday loan
is no different than walking into a retail store and deciding
whether or not to purchase a product based on how much it costs.
The Double Standard
If one is to insist on using an APR basis, then one must
be consistent in its application to other transactions. Payday
loan APR is calculated thusly:
(Fee / Amt. of transaction) x (2 weeks x 26)
If I go to an ATM that's not affiliated with my bank
and withdraw $20, I get hit with as much as a $3.50 fee. On an
APR basis, that's 455%. If I bounce a $100 check, I get hit with
an NSF fee of $30 by my bank. The APR is 650%. If I pay my $100
credit card balance late, the company charges me a $28 fee. The
APR is 728%. These percentages are actually deceptively low because
I extrapolate each transaction over two weeks. In fact, all of
these transactions are instantaneous, making their effective APR's
But do activists attack these outrageous APR's? They
do not. Why? Because they have a double standard, driven by a
bias against payday loans.
Are payday loan fees "too high"?
Payday lending establishments are dealing with a high-risk
clientele. The way our banking system works is that the more credit-worthy
a person is, the lower interest rate that person can get for a
loan. The effective APR's charged on these types of small loans
are going to be considerably higher because of the high-risk clientele.
The entrepreneurs in this high-risk industry must find a way to
recover their investment and earn a positive rate of return.
Dr. Lehman points out that these entrepreneurs "are
drawing scarce financial resources out of some other line of investment,
and committing these resources to a high-risk venture in making
unsecured loans to borrowers, the large majority of whom have
poor credit histories. Because the risk is relatively higher,
the risk premium on the loan will naturally be higher.
Additionally, the fixed labor and capital costs associated
with offering and underwriting a small loan are the same as offering
and underwriting a larger loan. With a larger loan principle,
the lender can cover costs and earn a profit by charging a lower
annual percentage rate over a lengthier period of time. Small
principle short-term loans, while costing roughly the same to
supply, cannot charge equally low rates of interest and expect
to cover costs. They must, therefore, charge higher rates of interest
over short payback periods in order to be profitably offered.
Thus, by their very nature and quite apart from the risk associated
with them, small-balance short-term payday loans must charge a
higher effective annual interest rate to induce profit-seeking
entrepreneurs to provide them. You cannot offer a product for
sale if you don't profit from it."
Do payday lenders "trap" people in cycles of debt?
Dr. Lehman reminds us that "this
allegation ignores the old adage that "correlation does not
equal causation." Payday loans appeal to a clientele who
face numerous financial difficulties (many of them self-induced),
quite independent of the payday lending industry itself. Most
of these households have failed to establish good credit, have
poor credit histories, are not known for their timely bill-paying
habits, frequently bounce checks, frequently change jobs, and
may relocate often. In short, they are the type of people who
are going to be frequently short of cash and who will borrow "chronically"
when given the opportunity. Because payday lending institutions
provide them with this opportunity to borrow when other institutions
will not does not mean that payday lenders cause this behavior.
They simply provide an opportunity for this behavior to be exhibited
more often than otherwise.
A payday advance is a product.
Like all products, it is possible to use them irresponsibly. Yet
how a product is used is not the responsibility of its manufacturer.
Who can forget the lawsuit against McDonald's by a client who
claimed the food made him obese?
How many times have you, while
driving a car, rolled through a stop sign? Have you ever failed
to stop for a pedestrian? Is this the car's fault, or the driver's?
It is possible to watch too much
TV, drink too much coffee, eat too much bad food, and give toys
to a 3-year-old when the package says "For ages 5 and up".
But the buck stops with the consumer.
It is not the liquor store's job
to identify alcoholics and refuse a sale. It is not a tobacco
shop's responsibility to ask customers if they have a predisposition
to cancer. It is not a car dealer's job to ask if a customer is
a bad driver.
In fact, we argue that liquor stores
and tobacco shops directly harm society and individuals by selling
their products to irresponsible clients. Their products promote
death, disease, and huge economic burdens on the state.
The Nobel Prize-winning economist
Milton Friedman, in his landmark treatise "Free to Choose",
states that people can look after themselves because they know
the most about themselves, and they will flourish if you let them.
We thus believe that consumer activist
energies are misplaced in focusing on payday loans, and that government
intervention does more harm than good.
Should the government regulate
Opponents think so. We disagree.
Let the free market take care of
What other business has their profits
artificially capped by government, save public utilities? None.
This is America, a country founded on free enterprise. Yet opponents
want to see fees capped on payday loans, without understanding
the economic realities behind the business.
In fact, we have already seen how
the free market regulates fees, without government interference.
Several states do not have payday loan fee caps. In those states,
fees did not spiral out of control. In Oregon, for example, the
going rate for a loan settled in at $20 per hundred borrowed.
The same has happened in Texas.
Why? Because the "correct"
price for a product is whatever the market will bear. This is
Economics 101, and the market has proven that a product's cost
will be determined by what a consumer with freedom of choice is
willing to pay for it.
Overzealous regulation harms consumers
1, we discussed how excessive legislation limits consumer
choice, and therefore increases the cost of the payday advance
Dr. Lehman tells us, "Government
regulations in the form of price caps on payday loan fees are
"solutions" in search of a problem that does not exist.
Further, they would create adverse unintended consequences by
distorting the market process. Indeed, these types of government
interventions into consumer lending markets have unwittingly been
partially responsible for the rise and popularity of the niche
payday lending market.
The Uniform Consumer Credit Code
adopted by most states already sets maximum interest rates that
may be legally charged on consumer loans of varying amounts. This
legal rate ceiling disrupts pricing signals emerging from supply
and demand conditions and creates a shortage of loans to low-income
recipients. The binding rate ceiling, contrary to its intended
purpose, prevents these low-income borrowers from establishing
or re-establishing credit, and restricts the availability of credit
to less risky applicants, again proving that the laws of supply
and demand cannot be overridden by the laws of politics.
Enter payday lending firms. By
charging a flat fee for a "loan" on a postdated check,
most of these types of firms are exempt from state usury laws
and mandated rate ceilings. In other words, these payday lending
firms have emerged to fill the gap left between supply and demand
caused by government regulations that create an artificial shortage
of conventional lending to high-risk borrowers.
In a twisted irony that only a
collectivist could love, payday lending firms have cropped up,
in part, as a response to government regulations that have distorted
conventional consumer lending markets, and are now under attack
from the very same political class that pressed for these regulations."
Are customers of payday lenders "victims" of the
in Section 1, any product can be used irresponsibly. However,
opponents of payday loans place the blame on the lender and not
where it belongs -- on the irresponsible consumer.
Consumer advocacy groups such as
OurOregon believe that they know better than payday lending customers.
This elitist snobbery demonstrates a mentality that is unhealthy
for the lower and middle classes. It supports the concept of a
"victocracy" -- where one group defines itself (or is
defined by another) as being "victims".
Instead of nurturing this unhealthy
sociological phenomenon, we believe in encouraging personal responsibility.
Opponents of payday loans subscribe to a political ideology that
people are not responsible for their own actions, that corporations
are to blame for society's ills, and that only government knows
what's best for people.
Opponents of payday loans define
customers as being "unsophisticated" because they do
not understand they are paying "outrageous interest rates",
without ever acknowledging that APR's are not relevant in the
customer's decision-making process.
Opponents believe payday loan customers
must be "protected from themselves".
Opponents do not believe that customers
are capable of deciding for themselves whether or not to take
out a loan and if the fee is acceptable.
Opponents refuse to believe that
payday lenders have a vested interest in working with an irresponsible
consumer so that they can recover their principal.
Is it just a coincidence that over
22,000 payday loan locations exist in the USA? Could an estimated
12 million Americans be so "unsophisticated" that they
have all been duped by these "predators"?
Have opponents considered that
the enormous demand for this product exists because people need
it, want it and understand it?
Ironically, by insisting that payday
loan consumers are victims, and that payday loans should be banned,
these opponents directly harm (what happens
if loans are banned) the people they purport to help.
Why don't opponents suggest alternatives to payday loans?
A few of them suggest other ways
to meet short-term needs, but most people either do not have access
to those alternatives or choose not to use them.
The reason opponents don't offer
other solutions for consumers is because there are no other solutions.
However, rather than address the underlying problems as to why
society doesn't offer low-income individuals emergency cash options,
they instead attack the one solution those folks do have!
Rather than find ways of encouraging
banks to attract the payday lending customer by offering them
products they need, opponents instead assault the one service
that has not abandoned these people.
When a person is in need of quick
and convenient cash, where can they get it? What other business
allows a total stranger to walk into their store, leave them a
bad check and a promise to pay up in two weeks -- with no form
of collateral whatsoever?
Would the opponents of payday loans
offer a total stranger money under those circumstances? They would
not. We see that as an elitist, hypocritical, and arrogant attitude.