That's one way to look at it.
Consider looking at these operations with a more critical eye. It's true, the interest rates they charge are high. The NYT once ran a story proclaiming that these places make loans at annualized interest rates of 312%.
But . . . who takes a year to repay a payday loan? That's like saying a hotel room costs $42,000 a year.
People don't rent hotel rooms by the year, nor do they take out payday loans for that long. That's not the purpose of a payday loan.
Now, consider the amount and duration of a payday loan. the WSJ says the average payday loan is $300 and lasts for two weeks. What sort of risks do payday loan places face that might explain their interest rates? Let's list a few:
- * Interest must compensate for the fact the loan may not be paid back at all by the high risk borrower
* Interest must compensate for the fact that the borrower likely has no collateral of sufficient worth to mitigate the risk of the loan
* Interest must compensate for the time that the money is loaned out instead of being put to alternative uses
* Interest must compensate for the various fixed costs and labor costs of processing the loan
For reference, many payday lenders will charge about $15 in interest per $100 lent.
The Do-Gooder Effect: Consumer advocates in Oregon were able to get a law passed restricting these places to 36% annual interest. Since most payday loans conclude in two weeks or less, this restricted lenders to making about $1.50 per loan. This amount is insufficient to cover the cost of processing the loan, much less any of the risk that needs to be mitigated. What happened? Three-quarters of the payday loan places in Oregon shut down.
Who are the losers?
Not the payday loan entrepreneurs. They have several other types of businesses they can invest in. The losers ware the low income people who desperately need $300 right now. They once had a short term lender that could hand them cash on the spot. Now they have nothing.
