No Big Payoff for Payday Loans

Perhaps no legal business is more vilified than the payday loan industry.  Dotted throughout poor and rich neighborhoods alike, these businesses cast a negative reaction as we drive or walk past them.  Whether we use them or not, society generally looks at the payday loan shop as an unnecessary evil. 

If it makes you feel any better, new research shows that despite their rich rates, payday lending is just an average business in terms of annual returns, providing roughly 10% per year in profit on average.  A December 2007 study (via Marginal Revolution) by Paige Skiba at Vanderbilt and Jeremy Tobacman at Oxford found that:

"Despite charging effective annualized rats of many thousand percent, we find lenders' returns differ little from typical financial returns."

I was fairly surprised by these modest profits for payday lenders.  But I was not surprised by the reason: Challenge.  These include:

• Federal, state and local governments have limited their rates and the amount of loans any individual customer may take out per year.
• Most loans are very small, providing an average fee of only $49.
• Big companies like Wells Fargo, Bank of America, and others have entered the market.
• 9% of checks from these borrowers bounce.
• Wages to employees take up 1/3 of revenue.
• Since it is relatively easy and cheap to enter the market, there is significant competition, which leads to lower fees and less traffic.

As regular readers know, I always like to finish my posts with a lesson on how challenge leads to improvement.  But I'm not sure here.  Overall, I believe payday lending IS a necessary evil.  People who are living paycheck-to-paycheck are under unique pressure and sometimes need a quick loan.  There's also the powerful argument that if these stores didn't exist, we'd see a return of the loan shark - who is conveniently free of government regulation, and carries a baseball bat. 

I guess the lesson is that challenge from government and competitors is keeping this industry competitive, and preventing it from charging even higher rates to people who desperately need this service.  So the next time you drive by a payday lender you might feel better that he's facing the same business challenges we do every single day.

Comments

[Payday Loans]

Our economy seems to worsen from time to time. We can never tell how this present economic condition will bring us.
During this time, more and more people are considering payday loan as a necessity. It's hard to live from paycheck to paycheck, but there's nothing I can do about how the economy is going, I am always forced to run to payday loans just to survive. As recession continue to cripple us, we should learn to find ways and means for us to survive. To read more economy news, visit your payday loan source.