Comments on: Missouri, payday-lending haven http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/ A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 http://wordpress.org/?v=4.2.5 By: Sameoldsameo http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34350 Wed, 21 Dec 2011 19:29:48 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34350 If payday loans are lenders of last resort for so many Missourians, what happens if these lenders are run out with a rate cap? Surely, our state’s “lax” lending laws would have facilitated better options by now… Instead of nixing the businesses doing the only lending, I’d rather see payday loan opponents present a better way to loan to the people that use these loans. But chances are they can’t, and they’d rather have these folks begging for welfare and food stamps than making their own way.

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By: wjsherk http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34297 Tue, 20 Dec 2011 23:26:11 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34297 There may be less mystery to the differences between “payday” and “small loan” lenders than meets the eye.

I believe many payday lenders also have overlapping licenses as small loan and title lenders. So there’s a distinction with no difference — except that the company will sometimes claim it was lending under the less-constraining license when accused of not complying with particular regulations (e.g. too many renewals or disguised renewals of payday loans).

The payday loan industry, based purely on its loan volume, may not be huge. But it’s hardly trivial. The critical feature of a payday loan is, as much as anything, that it is the LAST loan. It’s rarely the first or only loan. It’s the one you get because you are so overextended in every other source of finance that you either default on other loans or grasp this straw. It’s rarely a good straw to grasp.

But for repeated and cyclical payday loan borrowing, these are consumers who would default on their other debt. But because of the high rates paid for this last bit of liquidity, they most often give up the ability to “get ahead” of their debt problem. So when the next “hit” comes to their cashflow, the payday lender — holding a post-dated check — jumps ahead of the mortgage, rent, car, tax, credit card, child support, etc. It gets paid while the other largely default.

That’s noty good for anyone — except the payday lender.

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By: Greycap http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34296 Tue, 20 Dec 2011 23:24:06 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34296 Oops – preceding calculation was actually done with the 6.4% rate. 6% annualized is only 354% Woo hoo!

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By: Greycap http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34294 Tue, 20 Dec 2011 23:21:08 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34294 @AdamJ23, good catch about the recovery – all of the preceding calculations assume 0%. But … the amounts involved are so small – $300 average – that if there is any legal or administrative cost to collection, recovery would quickly be driven to zero.

But for the record, 166% = 26 x 6%, yes. But this calculation has no practical purpose. If you want to know the expected fraction of lent money that will be lost (assuming zero recovery), it is 6%. No matter how many loans are in your portfolio or what time period you are considering, it is 6%. If you want to know what interest rate you need to charge to cover credit losses, it is 6% *per loan period*. By assumption, that is 14 days in this case. That works out to a 402% annual rate: (1 + 0.06)^26 – 1. Then you still have to charge for costs, the time value of money, and the price of risk.

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By: realist50 http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34291 Tue, 20 Dec 2011 22:00:11 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34291 AdamJ23 – “breakeven” is earning $0 return before considering any administrative costs or earning any return on capital. Administrative costs are not trivial – labor, real estate, etc. – and are likely especially large on such small average loan amounts. There’s also the need to earn some rate return on the capital deployed before making real profit. Granted, that amount of capital appears not to be huge, as 2.43 million loans at an average of $307.56 equals $747 million of loans originated per year. To the prior point, however, this figure is an annual number, so the loan amount outstanding at any 1 time is in the range of approximately $14 million (if the average term on each loan is 1 week) to $60 million (if the average term is 1 month).

This loans outstanding estimate also puts Felix’s alarm over the size of the industry in a different context. The total outstanding payday loans in a state of 6 million people – plus whatever number are coming to Missouri from the “9 contiguous states” since it sounds like Missouri’s regulations really are laxer – adds up to the assets of 1 extremely small community bank.

Is there any evidence other than Felix’s musings that this industry earns abnormally high returns? It sounds like there are a reasonable number of competitors, so I’d think that competition drives rates to a reasonable level of profit relative to risk. I agree with Felix that in most cases it’s a poor life decision for people to take these loans, but, at some point we have to let people make their own decisions, so long as the economics of a transaction are fairly disclosed.

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By: AdamJ23 http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34282 Tue, 20 Dec 2011 20:30:48 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34282 Anonymous- You have a valid point, but you are assuming all loans are for 2 weeks and all defaults are 100% losses to reach your 166% break even point. I can’t see either of these being true. And 166% is a still a long long way from 445% interest rate that the industry is charging.

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By: djiddish98 http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34277 Tue, 20 Dec 2011 18:44:31 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34277 I’m still wrapping my head around this, but please disregard my previous comments.

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By: Anonymous http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34272 Tue, 20 Dec 2011 17:48:58 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34272 I also see a huge problem with this analysis. Based on the row descriptions given, it seems clearly spelled out that the default rate is for the number of loans and is not an annualized rate. So for a two week loan at 6.4% default rate, over 1/26 of the year, would requre an APR of 166.4% just to break even. Capping APR at 36% would clearly shut down the industry, handing the industry over to loan sharks.

Can you check on this Felix? Love your blog.

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By: djiddish98 http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34265 Tue, 20 Dec 2011 16:40:43 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34265 @greycap

I read the chart as follows:

From the time frame between October 1, 2009 and September 30, 2010, 6% of loans defaulted – that’s why I assumed it was an annual default rate. Basically, I assumed this was data from FY10, not from January 2011.

Are you interpreting this as monthly data?

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By: Greycap http://blogs.reuters.com/felix-salmon/2011/12/20/missouri-payday-lending-haven/comment-page-1/#comment-34258 Tue, 20 Dec 2011 13:51:05 +0000 http://blogs.reuters.com/felix-salmon/?p=11568#comment-34258 @djiddish98, the sums in the table are annual, but 6% applies to the number of loans (e.g. 124,000/2mm is about 6%), not the annual rate of default. The 6% figure is the default rate per loan term, not per year. If 6% of all 1M term loans held to maturity default, then 6% default, whether the measurement period is 1M, 1Y, or 100Y. The 6% monthly breakeven rate is actually about 101% annualized, so TimWorstall’s floor is too low.

But how are you guys interpreting that table with such confidence? The document states that in Missouri, such loans may have terms between 14 and 30 days, and the table says e.g. that on average loans were rolled over between 1.6 and 2.8 times. So is the typical loan closer to 14 days or 30? I would guess 30, since so many are rolled over. And is a rolled over loan counted as one loan or two? I would guess two, since the default rate is fairly stable even though the rollover rate is not. But those are just guesses.

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