Could You Survive on 36 Percent Interest Rates Or Is That Too Little ?

Of course, that depends on which side of that 36 percent you’re on, right?

If you’re paying 36 percent interest on a loan of any type, you’ll find it very difficult to ever repay it by making only the minimum payments.

But, if you were earning 36 percent on your investment portfolio, it would double every two years. Starting with just $1,000 in the bank, in twenty years you’d have over $1,024,000 depending on your compounding schedule. A 36 percent return on investment is a dream come true for most businesses.

But, apparently 36 percent isn’t enough for one Payday Loan Company! Legislators in Oregon passed a law that limited interest rates to 36 percent and it drove one lender out of business. (If you’re wondering why “Payday Loan” is in bold text, it’s because I limited the advertisers from using bold text words in contextual advertising)

From the article:

W. Allan Jones, Check Into Cash chief executive officer, said the new law hindered its efforts and proved too tough to work around.

“We tried to work within the constraints of the law, but lost money each and every month we tried to operate there under the new rules,” Jones said. “We have proven that it cannot be done.

“We are saddened that we have been forced to close our stores, putting our employees out of work and leaving our customers without a service they appreciated.”

For the record, I’m very “pro-business,” having owned several businesses myself. I firmly believe in capitalism and free enterprise, and I strongly believe in limited government interference in anyone’s life. But I have to support the legislators on this one. If a company cannot make a profit by charging people 36 percent interest rates, then its business model is flawed. Period.

I’m well versed in corporate finance and I do understand they don’t always get the full 36 percent interest rates because they have loans that go into default. But with a flawed business model that loans money to people with credit scores that hover in the low teens, what should they expect?

The entire industry produces nothing to help our economy. Its only product is debt and ruined finances. Here’s how the cycle goes according to a commenter who worked in the industry:

Lets say your car breaks down and the repair is going to cost you $500.00 You make $1400.00 every two weeks and are already paying rent and other bills that use up most of that money requiring you to look into the payday loan in the first place.

You qualify for a $600.00 loan which cost $685.00 to repay. Now the customer might not need $600 but we suggest that they might have some unexpected expenses with the repair because its only an estimate so you might just want to go for the $600.00.

Now, when payday comes along, they bring in the $685 to pay off what they borrowed. But they didn’t make an extra $685.00 that payday to help cover all of their other expenses, and they have rent coming up and other bills to pay too. So what do they do? Re-borrow the $600.00.

I saw the same people every two weeks paying $95.00 for a $700 loan every two weeks for more than a year on end. The initial loan was $700 and they paid per year $2565 in interest fees to borrow it for a year.

One person was quoted as paying over $3,600 in interest over the course of a year for a $600 loan. THIS IS INSANE!

Payday Loan companies reflect what is currently wrong with America and its drug like addiction to credit and debt. And though I am thrilled to see the suppliers close up shop, I know that we won’t conquer this addiction by limiting the supply. It will just go underground. Where we need to work is on the demand side. That’s why I blog about personal finance. Our war on drugs hasn’t worked very well because our government has only focused on the supply side with lots of guns and spies and botched para-military actions. What works exponentially better is to curb demand through education and rehabilitation. Why can’t we do both?

If you, your family, or friends have gotten mixed up in the destructive cycle of payday loans, take a moment to educate yourself and them through the power of the personal finance blogosphere. Check out these sites:

Confessions of a Former Payday Loan Employee.
Keep Grandma and Grandpa Out Of The Payday Stores.
Some Payday Loans Charge Over 1,000%
10 Reasons to Have an Emergency Fund (one of them is to never use payday loan stores)
If You’re Using Payday Loans You Could Be In Trouble.
Georgia Prosecutes Payday Loan Violators.
Why You Should Get a Payday Loan. (Not what you think!)
What Are You Talking About Willis? High Interest Loans?
Study: Payday Loans Cause More Bankruptcies.

[tags]loans, predatory lending, lender, budget, interest rate[/tags]

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