Comments on: Why low-interest payday loans could scale http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/ 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: Piyushr http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-37681 Sat, 07 Apr 2012 12:33:06 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-37681 If you’re thinking about applying for quick cash payday loans, you have to be at least eighteen, employed and a UK resident. If you fulfil those criteria and have an active bank account, you can apply. You then just need to include a few details about your home, work and banking account, and your application will likely be fast-tracked to a quick decision.

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By: Truthvsfiction http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34985 Fri, 13 Jan 2012 20:17:51 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34985 Mr. Salmon,

Several points being made in your article are incorrect and there are some points concerning the economics of lending that are being ignored.

First, the assumption that losses (defaults) are front loaded is incorrect. While a higher percentage of losses incur in the first 50% of the average term length, losses are none the less incurred throughout the period. And since loan balances very, a higher balance loan defaulting at nine months may carry more impact than a smaller balance at three months. The point being that the statement about “front loaded” losses is incorrect.

Second, if you are lending for shorter periods of time, your are earning less “interest dollars” to pay for the expense dollars you incurred to make and book the loan. And it is interest dollars, not interest rates or APR, that pays the bills. Too often people have lost focus on that truth. Some do so intentionally because it supports their cause.

This goes to the heart of the point Megan was making. That is it is the expense (hard dollars) that goes into making and managing a loan that carries the greatest weight. And therefore you need to earn sufficient interest dollars to cover that expense, then cover losses, then cover cost of funds, before even reaching a profit goal.

Too often in this debate the conversation has centered around what cost of funds are and what is being charged. People then incorrectly assume that if it costs a lender 3% for the money and they lend it at 36%, then the 33% is a large profit.

Yet 36% on a $500 six month installment loan is just $53 dollars total interest, or $8.83 a month. If the allocated operating expense is $15 to $20 a month per loan, then providing a loan at that rate is a loss.Numerous studies have shown that it costs $200 to $400 a year to book and manage a loan (assuming monthly payments).

Thats why bank’s and credit unions don’t make these loans.The return in dollars is not enough to offset dollars expensed.

The higher rates for small dollar loans are mostly driven by the economies of operating a business everyday, not losses. In fact, most small dollar lender’s losses (annuualized) are lower than credit cards.

Your assumption that credit unions can and should make these types of loans is misplaced. The economic reality is that smaller dollar loans cannot be offered at lower rates because they simply do not produce sufficient dollar revenue to cover costs.

But I do appreciate your focus on keeping the discussion geared towards economics and not making it a totally socialist point of view.

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By: Truthvsfiction http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34984 Fri, 13 Jan 2012 19:37:09 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34984 Mr. Blaine of NC SECU,

As discussed in the North Carolina Commissioner of Bank’s meeting last fall, the assumption of the SECU SALO (payday) loan being profitable was wrong.

The analysis performed by Michael Stegman in his payday paper several years ago and of which has been the source for the claims of the SALO’s profitability is wrong.

Mr. Stegman incorrectly computed the ROA (Return on Assets) by counting the same $500 loan multiple times (to reach an annualized number). This had the effect of significantly overstating average assets and therefore materially understating the loss percentage.

I also believe there is some question as to the validity of the expense allocation in the ROA calculation. The largest expense of providing a loan is not the cost of funds, nor is it the losses. It is the operating expenses. And whether it is a $250 loan or a $2,500 loan, it cost the same to underwrite and managed.

My guess is that if the SECU allowed a proper analysis to be conducted by a legitmate accounting source, the actual results would be considerably less than you have been promoting.

Supporters of “non-profit” lending, Community Development Credit Unions, and progressive advocates have touted this “false” return as a showcase of the cause for attacking market rates.

But the bottom line is that statements concerning this product’s profitability are wrong. Of course that has never stopped some people from continuing to say its something that it isn’t.

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By: kburton http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34934 Thu, 12 Jan 2012 16:19:57 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34934 One other option that is popular is going through a peer to peer loan route, sites such as lending club, prosper, offer consumers real alternatives to borrowing money by letting their peers set the rate based on their credit and borrowing needs, and the rates are certainly not 300% or higher as with most payday loan providers, you can find more information online at http://www.personalloanonline.org for those who might want to explore a personal loan or signature loan from their peers

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By: JimBlaine http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34913 Wed, 11 Jan 2012 16:47:53 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34913 Mr. Salmon,

Would be glad to send to you the PowerPoint given to the CFPB on the NCSECU “payday loan” service (Salary Advance Loan).

SECU has made over 3 million individual loans/advances totaling more than $2 billion over the last ten years. It’s available 7x24x365 through our Contact Center.

We have “the metrics”! The P&L is on frame #8 on the PowerPoint.

Very much welcome your scrutiny and questions. Even at 12% APR and no fees, it is the most profitable loan we make!

Best regards,

Jim Blaine
President
State Employees’ Credit Union

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By: TFF http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34908 Wed, 11 Jan 2012 02:41:50 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34908 GWilli, you are confusing “non-profit” and “tax free”. Businesses (and presumably banks) pay taxes on their PROFITS not their REVENUES. Big difference between the two.

Moreover, most non-profit organizations are forbidden to make a profit. If they start to accumulate too much money, they have to find a way to spend it (or cut revenues). Not sure how credit unions manage this, but presumably they have a mechanism to distribute profits to their depositors/stakeholders?

Non-profit or no, you don’t pay income taxes if you don’t turn a profit.

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By: GWilli http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34904 Wed, 11 Jan 2012 01:19:08 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34904 One thing you mention is that Credit Unions are non-profit. This means they pay no federal or state income tax. You fail to mention that this makes every loan they make – payday or otherwise, taxpayer subsidized to the tune of 40% or so. I could make loans all day if the taxpayers were willing to subsidize every loan I made.

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By: marcodmarco http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34895 Tue, 10 Jan 2012 17:48:08 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34895 Is a payday advance a good loan option? Learn the truth from a former employee at http://www.advanceamericaonline.blogspot .com/

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By: offbeat http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34871 Mon, 09 Jan 2012 19:32:28 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34871 There was a 36% rate cap placed on lenders to military personnel. That didn’t give our troops better options, it gave them less because those lenders closed up shop. The rate cap is designed not for consumer protection, but to shut these businesses down. Rate caps basically serve to say: if you’re poor, you can’t be trusted with your own borrowing, so we’re stepping in and taking credit away. That’s not freedom. That’s not what our troops are defending us for.

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By: realist50 http://blogs.reuters.com/felix-salmon/2012/01/08/why-low-interest-payday-loans-could-scale/comment-page-1/#comment-34869 Mon, 09 Jan 2012 18:50:54 +0000 http://blogs.reuters.com/felix-salmon/?p=11783#comment-34869 Clicking Felix’s link to this Salary Advance Loan product, it looks like the APR for most borrowers is 12.0% (not 5.5%), but walk through the math on these loans at 12.0%. Assume an average borrower wants $300 for 1 week. The max loan is $500, so $300 average seems reasonable. One week seems reasonable assuming a 2 week pay cycle, and the loan terms are that a Salary Advance Loan must be repaid from the next paycheck. $300 * 12.0% divided by 52 weeks (assuming a simple interest calculation of APR) results in $0.69 of interest. For clarity, that’s less than 70 cents, and it’s 0.2% of the loan balance. For the lender not to lose its shirt, it needs to underwrite to a 0% loss rate, for all intents and purposes. That could be reasonable for this product, since these loans are only available to credit union members who have already established direct deposit of paychecks.

So, assuming that a teller’s salary, benefits, and employer payroll taxes run $15/hour, this product is maybe break-even if it takes 2 to 3 minutes of time for a teller to process this loan, though that assumes minimal incremental back-office costs to establish and administer the program, as well as a minimal cost of funds for the credit union. The point is that – best case for a credit union – this product pretty much has to be subsidized by other activities. I suppose that a credit union can choose to provide this service at a loss – Felix makes a case for it – but I wouldn’t operate under an illusion that these loans are even modestly profitable on an incremental basis.

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