Why aren't there honest payday loan organizations?

[nancylebov]

Description of loan scams-- not just extremely high interest, but extorting money from people who either repaid loans, or who only applied for loans.

I've been wondering for a while why there aren't decent check-cashing and payday loan companies-- charging higher than average interest, but not outrageously so, and making the terms clear. This should especially be the case for check-cashing companies, because it seems like they're unlikely to lose money on the checks they cash.

This seems like something a non-profit or a not-for-profit could get into even if there are no for-profit corporations who want to do it (and why not?), and be a really valuable service.

What am I missing?

Comments

[thnidu]

credit unions?

[madfilkentist]

Is it true that there aren't any? I haven't researched it.

It's possible that the field has such a bad reputation that only people with poor judgment even try to get payday loans, so honest lenders just stay clear of the field. It might be like trying to start a reputable Internet-based lost-money recovery business in Nigeria.

[chickenfeet]

It used to be quite common for grocery stores to cash pay cheques from reputable local employers.

[nancylebov]

Thanks for the information. The next question would be why they stopped.

[chickenfeet]

Well I think most reputable employers pay by direct deposit these days

[nancylebov]

That implies a fairly recent shift.

I was expecting you to say that local groceries knew who was reliable, but big chains didn't.

[chickenfeet]

I suspect geography is a factor here. When i worked in the UK in the 1970s I was paid by direct deposit. When i moved to Canada that changed to a cheque but by the 1990s it was direct deposit again. In most of Europe cheques have been completely eliminated so not an option for wage/salary payments. As so often in monetary matters the USA is decades behind the rest of the world.

[geekosaur]

Some of them still do; I was reliant on the local Giant Eagle to cash my paychecks for a while, and it went well after a couple week hold when I signed up so they could verify my employer (in a different state; consultancy, most of us are work-from-home types scattered over many states). Eventually I got direct deposit set up though and didn't need it any more.

IIRC the fee was a fixed $3 per check, not a percentage.

[firecat]

This gets into some reasons, and is an excellent read in general.

http://strikedebt.org/drom/

[nancylebov]

Thanks-- looks like a promising book. However, I skimmed the chapter on how the precariat borrows, and there didn't seem to be anything about why there aren't better institutions.

[firecat]

Because it wouldn't be as lucrative as the existing institutions, which are major corporations in their own right. Loans that are more reasonable for consumers would be less profitable.

See chapter 8:
"'Respectable' banks and financiers have always tried to distance themselves from the taint of loan-sharking and other fringe financial services. For many people, non-bank lending has traditionally conjured up images of dilapidated storefronts on the edge of town, surrounded by vice and petty criminality. But if you’re one of the twelve million Americans who took out a payday loan in the past year, it’s more likely that you did it in a suburban strip mall or cyberspace. It’s even possible that you got it from a bank—five large banks, including Wells Fargo, have begun to offer payday loans. (They call them 'direct deposit loans,' but don’t be fooled; they’re just as bad.) Although they seem to be worlds apart, in reality these banks and fringe finance are interconnected and overlapping; the biggest players in all segments of fringe finance are publicly traded, national corporations. Around 20% of all users of 'alternative' financial services (AFS) also use traditional banks. And even fringe financial services earn profits for wealthy investors—via the very 'asset-backed securities' that brought down the financial system not too long ago. Whether sourced in prime credit or subprime, student loans or pawn loans, the profits of our indebtedness flow to the wheelers and dealers on Wall Street."

and (emphasis mine)

"Today, fifteen large corporations, which together operate roughly half of all loan stores, dominate the industry. Of these fifteen, six are publicly traded companies...Many of these companies also operate payday loan sites on the internet."

and this was linked from the same page:
http://www.nytimes.com/2013/02/24/business/major-banks-aid-in-payday-loans-banned-by-states.html?pagewanted=all&_r=0

And Chapter 7: "Companies like Walmart, Kmart, and Best Buy have also tapped into this market by offering check cashing at their stores."

[schemingreader]

How could there be a pay-day loan scheme that was not exploitative? I thought the whole point was that they were high interest, short-term loans. If they are high interest and short-term, then for sure some people are going to default, and those people are going to get ripped off big time. As opposed to the people who do not default, who will still get ripped off.

There are non-profit organizations that provide short-term loans at low interest. There's a kind of Jewish organization that in the US is called the Hebrew Free Loan. They charge so little interest that they don't make a profit. These loans used to be only for Jews at one time, but that hasn't been true for decades. There's also this concept of micro-loans.

But all of those are for people who are using the money for things like education or a small business. Most of the people who use payday loans, according to research by the Pew Center, are young adult women, mainly white, tend to be recently separated or divorced, and mainly, used for paying regular bills, like rent.