I Took Out PayDay Loans

payday_loansThis is the most expensive post I’ve ever written, as it cost me over $80 to conduct research. I took out two payday loans this month in downtown San Antonio, TX.

The natural joke to make here is “something, something, the death of journalism,” when finance columnists/bloggers need to take out monthly payday loans. Maybe instead the joke is on a different industry, as a former Goldman Vice President (“just a heartbeat away from the Presidency” as the thousands of us used to joke) ends up taking out payday loans. Or maybe you should just stop making jokes because this is how millions of your fellow citizens get money in between pay checks – like 12 million Americans per year, according to The Pew Charitable Trusts.

The Good

My basic starting assumption was that banks don’t really make personal loans anymore – credit cards kind of took over that niche market. A teller at my business bank – where I’ve had an account for twelve years – confirmed my assumption, saying they wouldn’t do it, and that few banks do. After the fact, I found out my personal bank does in fact make personal loans on good terms – 9 percent APR (Annual Percentage Rate) for 3 years on a $2,500 minimum, available in my checking account on the same day. But I believe they are the exception. And all that good deal of course depends on having good credit, which not everyone does.

So, assuming the payday lending filled a niche that banks vacated, I went on my quest for personal experience of the payday loan industry.

I borrowed $200 from Courtesy Loan Service on Broadway. The whole process took 90 minutes, start to finish. Much about this experience, in a strange way, suggested a quaint throwback to the Bailey Brothers Building and Loan from It’s a Wonderful Life. I mean that in the sense that a nice teller recorded my personal information in pen, by hand. She asked for three personal references and the name of my supervisor at work. I saw almost no evidence of computer technology. They appeared to use 5×7-inch paper notecards in a recipe box for tracking clients’ loans. Seriously. They ended up printing my loan on carbon copy paper, using what looked like a dot matrix printer.

bailey_building_and_loan

I almost told them that 1983 called, and it needs its technology back. But of course the joke’s on me, because I’ll pay an equivalent of 102.31 percent annual interest on their loan, if I pay it off in installments over the next eight months as suggested. So who’s laughing now?

I also walked into Ace Cash on San Pedro Ave and borrowed $200. When I arrived, the teller behind the window pointed me to an electronic kiosk, where I could enter my application in just 5 minutes. These folks, by contrast, operate in 2016.

I filled in my personal information on screen, and then spent another 15 minutes on a three-way phone call confirming my identity with my personal bank. Finally, I walked back to the teller with my bank information confirmed, and showed her my driver’s license. I provided a reference – my wife – and my phone number, which the teller confirmed as legitimate by ringing me while I stood in front of her. She couldn’t have been nicer. In a clocked time of 32 minutes, I walked out the door with $200 cash in my hand. They have impressive technology, automation, and fraud-mitigation techniques.

The Bad

The interest rate here is not only absurd, but cruel. My $200 Ace loan cost me $51.52, for an APR of 336.72 percent, as clearly stated on my receipt. The effective interest rate will be even higher if I pay back the money faster than one month. That’s not a good look, to say the least. I say not good because one would expect these loans – like Courtesy’s Loans,’ violate usury laws, if such laws actually existed.[1]

The Ugly

But the fine print is also interesting.

Within my automated email from Ace – titled “Your Loan Document Enclosed,” – my loan document stated clearly “We do not make loans, but instead provide credit services.”

ace_cash

Then “In consideration for the credit services that we provide you under the Credit Services Agreement, you will agree to pay us a fee (the “CSO Fee”) equal to 25% of the Amount Financed of any Loan you accept from Lender. For example, if we arrange a $200 Loan for you, the CSO Fee would be $50.00.”

Which is, exactly, what we did.

Ok, so, to be clear, on top of the usury problem, there’s the whole lying problem. In Texas, unlike 19 other states where Ace Cash operates, Ace is not a “lender,” but rather a “Credit Services Provider,” and my $50 in interest is not “interest” but rather a “credit services fee.”

I’m not a lawyer and this is not a legal opinion, but obviously that’s a complete lie. And I understand legal fictions happen all the time and for good reasons explained by lobbyists over lobster bisque and that I shouldn’t trouble my pretty head about it. I’m just noting things.

I tend to think I’m more creditor and finance-industry friendly than my average fellow citizen. I usually think a competitive loan market provides the best chance for the best service, and interest rates reflect a reasonable combination of people’s personal credit and the true risks taken by the lender. I can make a strong case, for example, for the existence of sub-prime mortgage loans at elevated interest rates.

But Holy Bejebus Batman! 300%+ interest?

That’s some dark, exploitative, medieval shit right there.

High_interest_rates
Medieval Shit

The good news is they don’t actually kneecap you when you don’t pay, right? I hope.

But I’m not going to put that to the test. My paycheck arrives soon and I’ll pay these things off then.

 

A version of this ran in the San Antonio Express News

[1] It’s super-difficult to tell if usury laws are even actually a thing. I know theoretically even the national credit card companies cap their rates at 29.99 percent. States seem to all set top interest rates, and then state lawmakers create giant loopholes through which payday lending companies can waltz. Your state, like mine, might say personal loans are capped at 24 percent, or commercial loans top out at 28 percent, or whatever. But there are massive categories of seeming exceptions that give the lie to whatever usury laws are supposed to limit.

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3 Replies to “I Took Out PayDay Loans”

  1. I was in the consumer loan business before the advent of the payday loan business (1975-1999) when consumer loan rates were set by the legislature and enforced by the Office the Credit Consumer Commission. I find it to be a common complaint that the consumer is overcharged while always referencing the APR. No thought is ever given to the cost of investigation before granting the credit or the cost of servicing the debt as to processing payments or collection activity if necessary. There was a need here as most of my customers had no banking relationship and the amount involved was deemed too small to be profitable for the bank. I regret the advent of the payday loan business, but I also feel that there must be a need for the service or they would not be able to exist. I would only request that you view the cost of the transaction in dollars rather just an APR which can be misleading on small amounts due to the cost of investigation and servicing the individual transaction. The cost is probably lower with the advent of computer technology but still plays a larger part in the company’s cost of doing business rather than their cost of funds. No one faults the woman’s dress shop for paying $25 for an dress and marking it up to $50 or $75 nor are they expected to disclose their product cost to the consumer. In closing, I do not in any way endorse the payday loan business, but there does need to be a source of small amounts of cash credit available to the consumer and banks do not want to meet this need.

    1. George, Thanks for your comment. I 100% agree that small loans to weak credit borrowers are super-costly to market, administer, and ultimately collect. There’s a good reason my bank wants a $2,500 minimum with a strong credit borrower (me)…smaller than that, and its not worth their hassle.
      The “interest” quoted as an APR is absurd, but I’m also in agreement that less than $25 or $50 of revenue per loan doesn’t make sense as a lender. On top of that, it’s interesting to me how many payday lenders (in my town at least) shut down on a regular basis, which indicates that even at ridiculous interest rates, the business for many is marginally profitable. It’s a conundrum.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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