David Stokes Takes Out a Payday Loan
Check out the latest entry in our series of economic performance art pieces, in which I take out a payday loan and then quickly lose most of the money at a casino:
Accompanied by my trusty colleauges, John Payne and Josh Smith, I decided that if we were going to write about the payday loan industry we should know exactly what the process involves. I think John summed it up best in the video when he pointed out that it took him less time to buy cars than it took me to get $50 from a payday lender.
John,
I like the concept of the video; however, I would suggest that perhaps Call-A-Ride is serving an employee, visitor, or friend of a casino patron. I’ve never gambled at one of our local casinos, but I’ve often visited with friends.
Comment by Thomas Duda — June 15, 2010 @ 11:18 a.m.
Yes, that is something I thought about after we finished filming the video. If that’s the case, I don’t have a problem with it, but unfortunately we can’t know for sure either way.
Comment by John Payne — June 15, 2010 @ 11:37 a.m.
Do you think that if you are uneducated and much more financially unstable there is a good chance of a different outcome?
Comment by Eapen Thampy — June 15, 2010 @ 12:17 p.m.
If we lived in a libertarian state, I’d agree with you that we shouldn’t regulate payday loan companies. But we already live in a highly regimented culture where a million different things are regulated.
Is it stupid to borrow money from a payday loan company or rent your furniture? Absolutely. But you’re smart enough to shoot your own videos, discuss politics and run a blog. You can probably spell amortization correctly.
Poor people aren’t as good with money and at a certain point it’s in the best interest of society that we regulate or flat out ban some practices. Usury is a practice that is so old and reviled that it’s found in the bible and was written about by Shakespeare. And for that matter, let me just link to some of the scripture because it’s going to make a better argument than I can and I’m not even a Christian: http://www.tentmaker.org/lists/UsuryScriptureList.html
Comment by KC Lowlife — June 15, 2010 @ 12:34 p.m.
Good stuff guys. But I do have a tendency to agree with the implication behind Eapen’s question. While I tend to agree that government has no business telling adults they can’t make stupid financial decisions, I’m wondering if society has an obligation to protect low IQ adults, addicted adults, desperate adults or mentally ill (but not yet diagnosed) adults from themselves.
Comment by Jack Naudi — June 15, 2010 @ 12:47 p.m.
I don’t know how you could get much of a worse outcome than losing almost all of the borrowed money at the casino. Wait, I know a potential worse outcome! We could legislate payday loans out of existence, people could address their short-term capital needs via loan sharks, and then if they can’t repay the money they get the hell beaten out of them. That would be a lot worse…
The basic financial needs of these “uneducated and much more financially unstable” (not my words) people do not go away because the government tightens up requirements for lenders leading them to further restrict access to loans. From my brief time at the store, it appeared most of the other people there knew full well what they were doing and what the costs were. The signs saying what the interest rates are are large and obvious. (That is an example of a state requirement I can support.) If your car is impounded and you need a quick $300 to get it out so you can get to work, you are going to get that money somehow. It is not a choice between taking out a 6 % loan at a bank and the much higher rate payday loan store. It is a choice between the payday loan store, the loan shark, or losing your job. It is hard to argue the payday loan is not the best option there.
Do I wish everyone were in a better financial shape and able to save a few grand as an emergency fund? Of course, but wishing does not make it so, and neither will government regulations in this case.
Comment by David Stokes — June 15, 2010 @ 12:52 p.m.
That’s a circular argument to evade the moral debate.
The mob uses assassins to kill competitors, so we should make murder a legal option?
And it’s not about notification or signs warning people of things. If a person doesn’t know what APR means and never graduated highschool(a common occurrence in Ivanhoe where I live) then a sign warning them of the 800-900% APR doesn’t mean anything.
You might as well put up a big sign that warns them about hemorrhagic fever, zombies rising from the grave and ever perilous Hydrogen Dioxide poisoning that occurs when people inhale the common and under-regulated deadly substance.
Finally, you’re also overlooking that many payday loans are now being handled online or over the phone. In which case, there isn’t even a huge sign, it’s just one more paragraph of multi-syllabic words that the consumer will never understand.
Comment by KC Lowlife — June 15, 2010 @ 2:33 p.m.
How transparent were the ‘late fees’ and such, if any fees exist?
That is my concern, allow whatever well-publicized interest rate the market will bear, but my cynical mind says that the businesses need the difficult to understand fees to make it worth their while, or at least get fat on.
Comment by Papillon — June 15, 2010 @ 3:20 p.m.
My recollection was that the primary signs were not described in APR’s, but clearly said that if you borrow X amount of money today you owe us X + Y amount in two weeks, for each of the most common amounts: $50, $100, etc. I don’t recall the exact wording of the late fees to the same detail, but everything you needed to know was on the signs or in the handouts, and it was written in a manner that you did not need a finance degree to understand it.
I am not at all evading the moral debate. I think it is immoral for the government to tell one private party that it can not lend out money to another private party at whatever rate the two parties agree upon.
To Jack Naudi’s question, our court system is there to protect people who can not make these decisions properly. If you lend money to someone who is not mentally able to make that decision, you take the risk that courts will not enforce your judgement against that person. No need to tell me of the real world issues there (will be person with an undiagnosed mental illness remember to show up in court or be able to get a lawyer?), but our current system does have protections against the questions that you brought up.
Comment by David Stokes — June 15, 2010 @ 3:42 p.m.
This is a really interesting discussion. Part of the reason why this question is difficult is because payday lending is not really the problem; the problem is that some people appear to be much worse off after getting payday loans than others. We don’t understand all the reasons why some people get sucked into a negative feedback loop and not others, although I will say that it’s probably really wrong that some companies put payday lending companies in nursing homes and next to military bases, two populations that appear to be much worse off with access to payday lending than not.
The other obvious point I think is that even though regulation might be able to tranche the market effectively, prior policy changes around the nation have taken the form of rate caps and outright bans. This is obviously inefficient, but perhaps other ways to structure the market in more incentive-compatible ways exist.
Comment by Eapen Thampy — June 15, 2010 @ 5:26 p.m.
I pretty much agree with all of that, Eapen. It would just take a certain percentage of families to either remove their loved ones from nursing homes with loan stores, or refuse to send them there in the first place, for many of them to stop allowing payday loan / title stores on the premises. It is wrong, and there is a very normal, market solution to that. As for military bases, the military operates outside of standard civilian rules and markets, so they can do whatever they want.
The frustrating thing, indeed, is that the entire industry would die if enough of their customers (who all have some type of assets, remember, either as a paycheck or title ownership) did nothing more than maintain a savings account with $1,000 dollars in it. That does not sound like much, but for whatever reason there are enough people out there that can not save anything and need to make use of short term credit facilities like payday loans.
Nobody uses a payday loan store “smartly.” Many people use it in a manner, though, that makes sense in an immediate manner, i.e. paying a high interest rate to get your car fixed so you can get to work is a better financial choice than losing your job. The regulations I have heard discussed by the Missouri legislature would succeed in reducing access to credit for people who need it and who don’t have other alternatives. I see no good coming from that, other than making certain elected officials feel good about themselves. The people in tough situations who need the credit will either go to worse options (loan sharks), or be further harmed by the lack of credit (not being able to get the car out of the impound lot).
I really appreciate all the thoughtful comments from Jack, Papillon, Eapen, and KCL. I hate the lottery and don’t play it, but I’ll admit it is largely preferable to numbers rackets. That, in a nutshell, is how I feel about payday loans.
Comment by David Stokes — June 16, 2010 @ 2:04 p.m.
I’m actually okay with the call a ride even if they were gambling. There’s only one cab company in the city with wheelchair lifts and they don’t have that many vehicles, so they book up. Call-A-Ride is close to the only viable option.
Comment by S/A — June 25, 2010 @ 3:02 a.m.
Also, poor people aren’t nearly as stupid as some of you think. :(
Comment by S/A — June 25, 2010 @ 3:02 a.m.
I don’t know which anonymous Show-Me Institute blogger is posting under S/A, but uneducated does not imply lack of sophistication. But education does have quite a bit to do with gaining sophistication.
In response to David, the payday lending facilities at nursing homes aren’t just for the patients…they’re for the employees. http://www.nursing-home-abuse-lawyer-blog.com/2010/02/missouri_nursing_home_payday_l.html
I would suggest that there is predatory behavior that payday firms engage in that is uniquely tied to information and power asymmetries they can exploit. This would explain why so many payday lenders are located in low income, minority neighborhoods; it’s easier to exploit the uneducated, poor, and/or politically weak than it is the rich.
Comment by Eapen Thampy — June 28, 2010 @ 1:03 p.m.
Or for that matter, when you know how financially stable your employees are, it’s easy to get them into debt and keep them there.
Comment by Eapen Thampy — June 28, 2010 @ 1:04 p.m.
I can guarantee that whomever S/A is they are not an anonymous staffer here. Nobody would do that to me in one of my posts.
Thank you for the additional info. regarding the employees of nursing homes. I don’t see how it changes anything, but it is worthwhile information.
Just because some people may fail to use the services of the lender wisely (or as wisely as you can use a payday lender, which isn’t very wisely), does not justify government involvement and interference in a voluntary private transaction. That is just something you and I are probably never going to see eye-to-eye on.
Comment by David Stokes — June 28, 2010 @ 1:19 p.m.
To clear the air, Sarah Anne already said who she is in comment 41 on this post: http://www.showmedaily.org/2010/06/the-smoke-free-cigar-bar-and.html#comments
I can personally vouch that Sarah is a real person who actually uses that as her non-anonymous handle online: it’s her initials expressed in a way that is non-ambiguous. She is also a very good friend of mine, and a longtime attendee of the Show-Me Institute book club in St Louis (she’s been coming longer than I have, and I’ve been coming since before I worked here). She’s even tagged in our book club photos on facebook. She has never worked for the Show-Me Institute, though I’m sure she has wanted to for longer than you have, ET.
Comment by Josh Smith — June 28, 2010 @ 2:06 p.m.
Thanks Josh. To further clear what I said, I have no problem with our visitors commenting anonymously. Indeed, I expect them to as is routine and standard in all blogs everywhere. I would not like it for our own staffers to comment anonymously on my posts, which I was certain had not occurred and which we now know did not occur.
Comment by David Stokes — June 28, 2010 @ 2:13 p.m.
A year and a half ago, Joseph Haslag pointed out to me via email a huge body of economic research demonstrating that credit markets among populations that we might regard as “financially unsophisticated” tend to be extraordinarily intricate, and that “It is much better to highlight the role that default risk plays” if we want to understand why payday loan interest rates are so high.
Comment by Eric D. Dixon — June 28, 2010 @ 2:55 p.m.