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

By Admin | Mar 14, 2008

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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.

Technorati Tags: loans, predatory lending, lender, budget, interest rate

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12 Comments so far

LP March 14, 2008

Today is why I read this site.

I have never heard of a PayDay loan.
The interest they charge is way too far out of bounds for us.
This sounds very much like loan sharks used to be.
But being “INC.” they’re legitimate enterprises! hummmmmp! :-\

Are they still called “loan sharks”? Or did peta influence the think tanks, that the word might hurt the big fishies feelings?

Thank you and God Bless America!

Ron 's reply:
March 14th, 2008
@LP:
They were giving sharks a bad name.
Frugal Dad (73 comments.) March 14, 2008

I have absolutely no use for payday lenders, and their “pawn your car title” cousins. Ever notice how these things crop up in the poorest sections of town? It’s as if they are doing their part to help the poor get poorer. What a disgusting way to make a buck.

Ron 's reply:
March 14th, 2008
@Frugal Dad:
Me neither. Makes me wonder how they can sleep at night.
Debt Free Revolution (3 comments.) March 14, 2008

Thanks for the link, Ron And these places aren’t just in the poor sections of town, they practically breed outside each gate on each military installation, and Congress passing the law limiting the interest rate to military has not made them go away.

Ron 's reply:
March 14th, 2008
@Debt Free Revolution:
What would be nice is for the military to make reading PF blogs a mandatory requirement for the military, especially The Wisdom Journal, Debt Free Revolution, Frugal Dad, My Dollar Plan, etc!
My Dollar Plan (11 comments.) March 14, 2008

I would love to earn 36% on an investment. However, I would feel horrible if I knew someone actually had to pay that much on a loan!

Ron 's reply:
March 14th, 2008
@My Dollar Plan:
Yeah, it would be one thing if you were creating value in someone’s life, but the only thing these loans create is despair.
fathersez (23 comments.) March 15, 2008

It’s really sad, how people can actually have the conscience to dream up a business like this.

And the guy who closed shop because 36% was too low, maybe he was borrowing from other payday lenders to lend to his own payday clients.

Ron 's reply:
March 17th, 2008
@fathersez:
I agree. I understand risk and making money because of it, but the rates and fees on these loans is out of hand. If people need an advance so bad that they’re willing to pay those rates and fees, what have we become as a society?
Ryan S.@uncommon-cents.net (14 comments.) March 15, 2008

if 36% interest isn’t enough to keep them in business, maybe that’s just a sign that people are wising up.

Ron 's reply:
March 17th, 2008
@Ryan S.@uncommon-cents.net:
I would hope! But there are other payday lenders in Portland that are figuring ways to get around the 36% cap by instituting certain “fees.”