## 22 July 2007

### payday loans

When Businesses Can Do Math, from Grey Matters -- interesting links about companies that can do math and use it to rip people off. Check out the fine print to this CashCall.com ad with Gary Coleman:

The APR for a typical loan of \$2,600 is 99.25% with 42 monthly payments of \$216.55

Yes, you read that right. The interest rate is almost ONE HUNDRED PERCENT. A person taking out such a loan will end up paying back a total of \$9,095.10. Their commercial makes it sound like they're lending money because they "trust" people, but that's certainly not the case. I suspect that at least one of the two following things is true:

• The people taking out these loans have a very high default rate. And I mean very high; if they were giving these loans at 30% (which is a typical rate for people with credit cards who have made a ot of late payments) then the monthly payment would be \$100.69 over 42 months (see this calculator), for a total amount paid of \$4,228.98. So I'm inclined to assume that the percentage of people who pay their loans back is less than half of the percentage who pay their credit cards back.

• There's not much competition for this sort of loan; people actually see this commercial and make a phone call without bothering to shop around. This seems pretty reasonable, because the sort of people who would shop around for the best deal are probably less likely to get themselves in this sort of trouble in the first place. Therefore, the loan companies charge the highest interest rate they can legally get away with. In fact, it wouldn't surprise me to learn that in the state where these

(Incidentally, I was looking for something to calculate the payments on a loan for me; the first google hit; I wanted to check the payments on the CashCall.com loan. It complains that 99.25 is not in the range from 0.01 to 99 and so I couldn't possibly have meant that interest rate. I did!

Here are CashCall.com's rates; it seems that in states where larger loans are offered, such as California, the interest rates on those larger loans are lower (as low as 21%). Also, for some reason they only offer loans in the amounts of \$1,000, \$2,000, \$2,600, \$5,075, \$10,000, and \$20,000; does anybody have any idea why?

As for the high interest rates, I've heard that small payday loans -- say, the type where someone borrows \$100 and has to pay back \$115 a couple weeks later -- have to have high interest rates because the cost of doing all the administrative work for the loan needs to be covered. But it seems a lot harder to believe this on loans such as those given by CashCall.com.

This reminds me of the Comcast "Service Protection Plan" I wrote about a few days ago, which I concluded was a ripoff. I was telling my father about this today, and he pointed out that "if they're trying to sell it to you, they expect to make money off of it". The difference is that Comcast was talking about a few dollars a month, whereas payday lenders are giving people a way to really trash their financial lives.

Steve said...

"if they're trying to sell it to you, they expect to make money off of it".

Well, all exchange is based on this principle. However, I have had very nice luck with Best Buy's service warranty. It gave me coverage after the manufacturer's warranty on my laptop burned out. After having to send my laptop out for repairs several times, they ended up just giving me a new one, plus an offer to extend the contract several years further. A friend tells me that laptop quality is severely diminishing across all brands, so perhaps this is Best Buy's clever way of keeping my business.

The Probabilist said...

Steve,

we actually then went on to discuss that for some reason, for laptops the extended warranty seems to be a good idea.

p. squiddy said...

There's a note about a \$75 origination fee that's probably added onto the \$5K loan. I guess the \$2500 loan has an additional \$25 fee in the fine print, that they will happily charge you interest on, so the total loan is this amount.

I think the large amount loans are teasers, since someone so risky as to require 100% interest would never get so much. The interest on these is lower because they probably go to people that aren't risky, just dumb (i.e., they don't shop around), and/or who have assets that could be liquidated to pay of the loan in collection.

It's sort of sad to read the testimonials on the website-- desperate people who talk about how easy getting their cash was, but no mention of how much fun it's going to be paying back four times as much as they borrowed.

Sudipta Das said...

I am applying for student loans and found a great place. I know when you use your student loan you are paying for school related issues, books, computer, tuition and etc. I told my best friend about the loans I was getting and she said that financial aid paid everything for her and she applied for student loans also and used them for shopping, paying off her bills and etc. Can't she get in trouble for paying off her credit card bills and other bills with a student loan? Thanks for your help.
sudipta das
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berto xxx said...
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Megan said...

I understand the need to make money times are hard but 100% interest is crazy payday loans should be used responsibily, and only when absolutly necessary. I know I have used them before through ACE cash express and when I paid it back there was little to no interest.

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