I’m strongly inclined to liberality of laws when it comes to lending. That is not just because as a lenders’ agent I have a conflict of interest. I actually detest the paternalistic idea that lenders trying to lend money at a profit is something bad. We have a ridiculous situation in Australia in which if you want to take leave without pay, go on maternity leave or just resign from your job and start a business or take a break using hard earned savings, it’s basically illegal to lend to you even if you have your head screwed on. If people really feel the need to sign up to bad deals then, short of ensuring that they have reasonable information about them I don’t see a role for governments tin stopping them.
I think the same on principle about payday lending – in which people pay what are huge rates of interest for short term loans. Translated into interest the rates are 400 – 1000% based on a survey in the US. That sounds outrageous, but this is a fee of $45 on an advance of $300 – and a large amount of it is not interest but transactions cost.
I was nevertheless amazed to read these facts in the recently released (US based) Journal of Economic Perspectives.
- Virtually no payday loan outlets existed 15 years ago
- today, there are more payday loan and check cashing stores nationwide than there are McDonald’s, Burger King, Sears, J.C. Penney, and Target stores combined.
Given that payday loans are so bad for your financial health it looks like some major irrationality going on here. I’m thinking that the state should be taking some intelligent interest in this, if for no other reason than what I expect would be its tendency to deliver its self chosen victims into the hands of social security systems, perhaps stimulate crime in various ways and also ‘normalise’ the idea of bankruptcy by increasing its incidence.
Of course you can argue that payday lending does the opposite of all these things since it gives people beginning to consider some of these options one last chance before taking them up. That’s certainly how I’d feel if I had to use one and I’d be incensed at not being given my last chance. But on those figures it doesn’t seem that’s how it’s being used.
Reminds me of the issues raised in the post on obesity a few months ago.
Years ago I heard about some Australian research where a cohort of battling “always in debt and struggling” families had some debts paid off (can’t remember how much) and the point was that a significant number never had any more trouble with their finances for the duration of the study.
There is an opening in the US for some group to step in and do a similar study to find how many people using these facilities could be out of trouble for ever with (a) coaching in budgeting and (b) a cash injection to be repaid at modest rates over a reasonable time.
While this is not a complete answer to this question, it seems that the demand for the cheque cashing side of things would drop through the floor if the technology available were allowed to overtake the delays involved in payment via cheque. Whether through smart cards or whatever system, there are hundreds of ways (technologically speaking) that people, even those without bank accounts, credit ratings etc, should be able to be given secure (eg password protected) payments which do not require clearance times.
Danielle,
What you say doesn’t make much sense to me – but maybe I’m missing something. Firstly one gets paid in arrears. So there’s always a financing issue getting to the first pay day. If it’s hard and it then takes another few days for cheques to clear, then that adds to the initial financing problem. From the day the money first becomes available to you it becomes available to you on the same day of the week, fortnight or month in the future. So it’s a temporary financing issue. Many people could handle that initial financing with credit card debt at 20% – or a loan from a family member and once they do that they’re in the same situation they’d be in had the money come straight through.
But secondly, I would imagine that most people are not paid by cheque but are paid by direct transfer to their bank account – as are centrelink beneficiaries (aren’t they?).
Am I missing something?
I can’t pretend to know that he’s still involved with them, but a few years ago it was mentioned in many despatches that Alan Bond was involved with one of the larger payday lenders in this country. And yes, I’m narrow-minded enough to believe that single factoid is enough to regard the whole industry with suspicion. Especially since it’s almost completely unregulated.
Nicholas, you are right of course about the initial financing side of things, but it seems somewhat an artificial sort of analysis. If you proceed on the assumption that people are able to cover their costs/demands etc for a fortnight with their fortnightly pay, then there would be little demand for such a service.
The use of such a service as payday lending seems to presuppose that people experience an urgent and immediate need (whether real or perceived) for cash outside of their ordinary income – and that they are prepared to “pay” well above the market rate for immediate access to that cash.
One reason for this might be where individuals are unable to obtain other cheaper forms of finance such as credit cards, or where their alternative means of finance are already exhausted.
On the cheque thing, it may be more prevalent in the US, but the very advertisement of cheque lending would suggest to me that some people in the category who would use this service would find a benefit of such a service – ie they receive payments by cheque. In particular, I see a lot of marketing at my local fast money place around tax time.
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