When you are researching payments, it is good to get as close as you can to the source. A few years ago, I visited five payday lenders in the US to see if the industry is as sleazy as the media portrays.
My takeaways were:
1. yes, interest rates are off the charts, often above 300%;
2. no, this is not run like a mafia enterprise;
3. yes, the industry is highly regulated
4. yes, many people are stuck in a situation of perma-debt where they keep refinancing and never pay off
5. no, you don’t have to use payday lenders unless you want/need to.
And, consumer practices in cards, where a $4.00 over credit charge generates a $35 OCL fee, and a $40 bad check fee on $5 is much more expensive than a payday loan.
This article from Australia strikes a chord.
• The post-GFC (global financial crisis) economy might have poured sand in the gears of many businesses, but one sector has been quietly booming: payday lenders.
• In fact the past 10 years has seen a 20-fold increase in demand for such lenders, who offer small loans to desperate people in exchange for eye-watering interest payments.
• The percentage of Australian households experiencing financial stress has surged from 23.5 per cent in 2005, to 31.8 per cent in 2015.
• A $300 payday loan with a four-month repayment period will cost a borrower $408 to repay in full. By comparison, an average credit card with an 18 per cent interest rate costs $305 to repay over the same period.
There is the reality of risk and reward. By definition, these loans default at a much higher rate than a credit card. The average credit card interest rate in AU is 17%. This is for credit qualified customers. It assumes a loss rate in the general range of 3.5%, interchange on all purchases (albeit at lower AU rates) and a long time potential relationship.If you are unbanked, or underbanked, you have a potential problem when you need emergency cash. According to the article, one fifth of AU households do not have access to $500 for an emergency need like a “car breakdown, sore tooth, broken appliance, or sick kid a financial disaster”. That is the void that payday lenders fill.
But consider the numbers of how frequently the borrowing occurs:
• A 2012 study estimated that about 1.1 million Australians were, on average, taking out three to five loans per year.
• An estimated 40 per cent of payday loan customers took out more than 10 loans per year.
Here’s a novel fix that seems awesome, but the Australian government:• A public social emergency lending scheme would allow all Australians earning under $100,000 to access a low-interest loan of up to $500 with quick approval.
• A maximum of two loans per person per annum would be allowed.• The latest report from the McKell Institute has modelled this out.
• If 35 per cent of the 8.3 million Australians eligible immediately took out a single annual loan of $500, the size of the scheme would be about $1.45 billion at a given point in time.
This looks like a nice potential solution for the unbanked. Not certain if this would apply to the US market without seeing some test results, though the theme seems right: “But inequality and poverty are problems in need of tackling. A government emergency lender would not do this on its own, but it could smooth out the volatility we know exacerbates real poverty.”
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
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