A Life on the New Planatation Thread: PayDay Lending

[EricK]

Really? If eg the effective interest rate for a four week loan is greater than the effective interest rate for a two week loan, wouldn't I just take out a two week loan, then pay it back by taking out another two week loan, then pay that back after two more weeks?

There is a liquidity premium on effective rates over a shorter term, although as Togo pointed out you open yourself up to interest rate risk. However, the liquidity premium is nothing like charging a higher actual rate for a shorter term. Why would I pay more to borrow money for 2 weeks, when I can hold onto it for 4 weeks for less? This is the analogy to payday loans (not the effective rate).

aa

Could you clarify with examples?
Eg What rate do these companies charge for a loan of $100 for two weeks, and what rate do they charge for a loan of $100 for 4 weeks?

 

[SimpleDon]

A word from John Oliver

Show

The suspension of usury was one of the many changes in fiscal policy that we instituted to accomplish the redistribution of income from the poor to the rich. We also made it more difficult to declare bankruptcy.

These loans are primarily taken out by the poor.

These are all just more reasons why we should reverse our policies meant to redistribute income from the poor and the middle class to the rich. In general the middle class doesn't take out payday, title pawn, etc. loans. In general the middle class doesn't commit street crimes which are committed largely by the poor and the middle class doesn't commit cooperate fraud or stock swindles which are largely committed by the rich.

We would solve so many of our problems by increasing the wages of the working poor and moving them into the middle class.

This statement could be applied to the majority of the threads in the political discussion section.

 

[ksen]

No way.

Working people making more money = communism.

 

[Alcoholic Actuary]

There is a liquidity premium on effective rates over a shorter term, although as Togo pointed out you open yourself up to interest rate risk. However, the liquidity premium is nothing like charging a higher actual rate for a shorter term. Why would I pay more to borrow money for 2 weeks, when I can hold onto it for 4 weeks for less? This is the analogy to payday loans (not the effective rate).

aa

Could you clarify with examples?
Eg What rate do these companies charge for a loan of $100 for two weeks, and what rate do they charge for a loan of $100 for 4 weeks?

Ugh, probably not.

1st, it is important to note that I'm talking about the Term Structure of Interest Rates, not the annual effective rate for like instruments. It doesn't make sense that I can get a loan for the term of 1 year for cheaper than I can get a loan for 1 month. There is more risk over a longer duration.

As far as an example, posters bring up annual effective rates of 400%. Assuming this is effective for bi-weekly compounding (reasonable for pay-day loans), then they must be charging:
(1+4.00)^(1/26) - 1 = 6.39% on every 2 week balance. I think current annual interest rates are in the 3-5% range.

aa