Why do we have payday lenders?
Payday lenders provide short-term, unsecured loans, sometimes linked to a paycheck, sometimes not. The amounts are usually fairly small–$100 to $300—although they can go higher. The service is popular: over 10 million people used payday loans last year.
The fees, though nominally small, can add up. For a $100 two-week advance, a payday lender might charge $15 up front. A borrower that does this 26 times over the course of a year will pay $390—almost four times the amount of the loan!
For this reason, payday lenders come in for a lot of criticism: they extract money from low-income communities, they lend to less-educated people, their ads emphasize convenience over cost, etc. But that’s where payday lenders compete—on convenience. If someone is short of cash and is facing a missed car payment or a bounced check, those costs are a lot higher. And a 20% APR for a $100 two-week loan would only allow a payday lender to charge 75 cents–less than processing costs, much less potential losses.
Payday loans exist because people need cash—and those needs don’t show up on schedule at convenient hours. “Price” isn’t the only way to compete.
Douglas R. Tengdin, CFA
Chief Investment Officer