It’s about time we saw some government action regarding payday loan lenders. There are changes coming fast all across the US that will force predatory lenders in the payday loan business to make changes in the way they do business – but do these laws have teeth? Will payday lenders find loopholes in the new laws?
Will non-conventional lending laws be enforced?
Do law makers have to make tougher laws?
Do the new laws give payday lenders too much wiggle room?
In different State Legislatures across the United States there are laws being passed that attempt to inhibit payday lenders from carrying out business in a manipulative way. It may not be that easy to deceive borrowers and applicants in the near future, but in my opinion the new laws give payday loan lenders way too much wiggle room.
Before I go any further, I want to make it clear that predatory lenders in the paycheck loan business are obviously in out there, but that does not mean that ALL lenders are unscrupulous.
Some lenders obey all of their State laws and they go out of their way to make sure the applicants and borrowers understand every penny of the fees and interest they will be paying.
I think that at as long a these non-conventional lenders make it perfectly clear to their borrowers what the associated fees, late payment penalties, actual interest rates (true APR), and their actual payment options are, then it’s just a legitimate business.
Payday Loan Companies Adjust To New Laws
I found it encouraging to see the Virgina General Assembly reformed their payday lending laws which took effect January 1, 2009. Here is a quote from the above referenced article;
“Payday stores are be barred from lending to borrowers who currently have unpaid payday loans from another lender and they can’t make a loan to a borrower on the same day that the borrower repays an earlier loan. Payday lenders also are prohibited from harassing borrowers who fail to repay a loan, or threatening them with criminal prosecution”
Great. Good start – right? Maybe not.
What some payday lenders did in Virginia to “get around” the new laws was offer a completely new lending product that has a massive interest rate. They started approving open-ended loans that carried huge interest rates and fees.
This whole thing reminds me of the movie Bedazzled when Dudley Moore (or Brendan Fraser depending if you have seen the original or not) asks the Devil for something and when it’s granted there is some other detail added to the wish – which is of course horrible. No matter how detailed the request made the outcome was always horrible.
No matter how many laws are made to stop paycheck lenders from charging extremely high fees and/or deceive borrowers, they seem to find another detail or loan product that fleeces the borrowers in the end.
Stop Lenders From Abusing The System
So what do the law makers do – it’s simple in my mind – the federal government can simply create a law which prohibits payday lenders from charging more than a determined APR or EAR – end of story.
So what would that legal APR level be? I don’t know….how about a maximum EAR (Effective Annual Rate) of 100%. Now let us do the math and show the difference between a maximum 100% EAR compared to what it is now.
APR Payday Lenders Charge Now
The law from State to State varies on the fees a payday lender can charge, but a good average seems to be $15 dollars for every $100 dollars lent. So if a consumer borrows $1000 for two weeks (which is very typical) this means they would have to pay $150 in interest when it’s all said and done.
For this example if the borrower was charged $15 interest over a term of 1 year they would be paying an APR of 15%. The issue here is that the customer is only borrowing the money for 2 weeks. This makes the APR skyrocket to 390%! Criminal don’t you think? But they’re not finished yet. They charge administration fees, late payment penalties, so-called State fees, etc., etc.
In many cases, by the time the total EAR is calculated the payday lender is lending money at a rate of over 500%. Keep in mind that a typical car dealership loan will only carry a 7% APR for the entire term of the loan.
If Payday Lenders Could Only Charge an EAR of 100%
So in my perfect world (“or more perfect union”), just for the sake of argument assume that the Feds passed a law in Congress that only allows payday lenders to charge an EAR of 100%. Sounds like a filthy interest rate still right? Just hold on a second please and hear me out.
So for a $1000 dollar loan the lender can charge $1000 dollars if the money is borrowed for a full 1 year period. Since we’re talking about a two week period we have to do some short division – $1000/26 (26×2 = 52 weeks in the year) = 38.461538461538461538461538461538. I think we can round this number off $38.46 – whadda think?
So in my fantasy scenario the payday loan lenders from coast to coast can only charge borrowers $38.46 total for a $1000 two week advance. After tax let us see what it comes out to. Furthermore, assume the Fed writes a law forcing payday lenders to only charge a State tax, and no City, County, Jurisdiction, or District tax. For our scenario lets make the State tax 7.25%.
So $38.46 x .0725 = 2.78835 (rounded to $2.79) Add $2.79 to $38.45 and that gives us $41.24.
This seems reasonable to me. I’m stuck behind an 8 ball and I need a quick cash advance for $1000 to cover the rent, make a car payment, go to the Casino, and drink my face off. I pay the payday lender a total of $41.24 to keep their $1000 dollar for a period of 14 days (or as the English would call it – a fortnight)
If payday lenders ever saw a Federal law coming down like this example they would be shaking in their boots. They would be terrified at such a prospect and claim that they would not have a profitable business model. Hmmm…what did people do in the 1930s when they were “behind the 8 ball”.
One of the reasons the payday lenders would cite for this claim would be that they have such a high rate of delinquency they would actually lose money after their Charge-offs were considered and their true overhead was calculated.
I say screw ‘em. They’re still making a profit and they’ll just have to be careful when it comes to choosing who to lend money to. Many payday loan companies would go out of business, and gee whiz……that would be a shame.
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A LOAN CALCULATOR FOR CRUNCHING YOUR NUMBERS IS BELOW; Enter your loan amount, how many years, the interest rate, and payment frequency (14 for biweekly, 30 for monthly, 7 for weekly. Very helpful so you know exactly what the loan will cost you in interest payments and you will know the total COB (cost of borrowing).
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