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Comment by 1123581321 | Hacker News Reader

What do you think about the idea that if someone is charging 20% on a loan and making easy money, you can offer the same service for 15% and take their business?* That is a race to the bottom, but it seems like it would be good for the customer.

* This is essentially what credit unions do with signature loans.

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If the 'invisible hand of the market' was indeed working, why are such obscene rates common?

In my mind it's profiteering on the backs of impoverished people.

What makes you think the rates are obscene?

Is there really any debate on whether or not 400% is obscene?

If you were asked to lend someone you knew was unqualified for a traditional bank loan $200 for a week, and you had to fill out paperwork, create a record, etc., how much would you want them to give back? If they gave you $205 ($5 for your trouble) you’d be roughly charging 130% APR and you wouldn’t cover your costs, let alone the risk. You can extrapolate 400% from this example.

Understanding how short duration, risk and operational overhead affects the rate is key to effective regulation in this industry.

Curious, but do you work in banking? I'm just wondering what else could potentially be motivating someone into thinking 400% interest on a short term loan that is by definition meant to be paid off on the next payday (anywhere from a week to fifteen days, or in some cases a month for individuals on a monthly/State-employee payroll) is anything but exploitative.

BANKS don't even give out personal loans at such absurd rates.

I used to work for a credit union that had a branch in a very troubled low income area. We worked really hard to get people to consider us as a cheaper, more transparent and ethical alternative to payday lending. So I know a lot about it as competition. Nowhere I’ve said it’s not exploitative. However, exploitative doesn’t mean that a high interest rate is extremely profitable as is popularly believed.

To clarify, payday lenders exploit people by a) encouraging loans for bad reasons, b) hiding details from financially illiterate people, c) trying to keep competition out of their market, d) not publishing comparable rates. But the actual business margins are not as good as 50-400% sounds due to the high volume/short duration/default risk.

Okay, then

You can extrapolate 400% from this example.

Consider me obscenely interested in understanding the math to break down measuring risk such that you end up with 400% annualized interest on a, say $1000 loan.

Again, even traditional banks don't hit applicants with poor credit this hard. Personally, I paid off a personal loan with my credit union down in Texas, only financial institution that would give me one with my credit. 18%.

I have yet to find anyone who can provide a convincing argument for why such a high interest rate is warranted compared to traditional lending sources who will have the exact same concerns and risks but charge demonstrably less.

Sure, if you loan someone $1000 and they have to pay you $1,080 in a week, your APR is roughly 400%. It’s just an extrapolation of the $200/$205 example. The risk would depend on the likelihood that the person would return with $1080, how many other loans you had to absorb the loss, your available capital, etc. I may not have understood your question, though.

Edit: in response to your edits, I think your credit union example is a good one. That is exactly why credit unions are valuable; they have a local/regional reach similar to payday, but they are cheaper, and they will lend to people that Bank of America, Chase, etc. won’t touch.

In my experience, credit unions have stricter lending rules. Mine does offer an overdraft protection, which is essentially the same as a payday loan, for $30; no matter the amount. I could go $2 over and bam, $30. This also applies to each transaction.

They do allow me to keep cash in my savings and still pull from this "credit", so for example I can transfer everything to savings and let my rent hit this "credit line", but if I'm not careful this is way more expensive then a payday loan.

Yes, there is an incongruence between use of a punitive fee to discourage behavior and the fact that fee revenue subsidizes low interest rates at many credit unions. The saving grace is that they are much more likely to refund the fee than a bank, but they don’t do it proactively let alone based on member profiling for financial illiteracy (low average balance, history of overdrafts, etc.) I think the approach could be much better.

Here’s a startup I really like that I think solves this overdraft problem effectively. They charge something like $1/mo for their service which likely isn’t sustainable standalone, but could work as a standard account feature at a bank/CU. https://www.dave.com

I have both a bank account and a credit union account (for various reasons, I actually have accounts with several local credit unions). My bank (USAA) will refund nearly any fee if you ask. My credit union will tell me to pound sand. I otherwise like them, but they are super strict. My bank also has zero-fee overdraft protection as well. But I have a credit card with them, so that probably is why.

If you think you could do it for less, why don't you? 200% returns would be yours for the taking!

Because I would not enjoy it and life isn't all about maximizing your income.

If my credit card had an APR of ~400% I would be ruined. Thankfully for me, I have enough financial assets that I will never have to take out a payday loan.

But for people who desperately need money now, and have no other choice, they're forced to accept these rates. It's profiteering on the backs of the very weakest people in society. That's obscene to me.

If this is indeed is a valuable service to society, cap the rates, and force them to be disclosed up front.

The annual rates are around 390%, and often cause bankruptcy:

https://www.consumerfinance.gov/about-us/newsroom/consumer-f...

What makes you think 300% interest on a financial instrument ISN'T obscene? I don't know of any other loan or line of credit with that kind of interest rate but payday loans.

Well basically because of the short duration and risk and small absolute value of the loans. To loan out $5000, often times a minimum from banks for a personal loan, I might have to do the overhead of 25 loans.

The rates are much more reasonable when you consider that.

Do you think there is a level of default risk that justifies a higher interest rate?

Higher interest rates, sure, but at some point it moves from "providing a needed service" to intentionally predatory.

This assumes people are A) rational and B) intelligent enough to shop around.

Neither is true.

It's quite likely that the company making 20% has a much higher marketing budget than the 15% one. People can't choose the cheaper option if they don't know about it.

Also many who end up taking these loans don't have reliable access to transportation, making shopping around logistically difficult.

Yes, I would suggest looking at how people comparison shop dollar stores and convenient stores to understand payday loans if you aren’t able to talk to customers directly. Rather than a comprehensive review, calling, etc., they tend to build up a body of experience (which can be shared with others) and make changes over time. It’s certainly not optimized behavior, but since the loans are frequent and short term, there is opportunity to correct course as opposed to something like a mortgage.

Can you really? Do payday loan customers typically comparison shop?

To further reinforce this point, find me a payday lender that up-front lists their Annual Percentage Rate.

They really don't which makes comparisons impossible or very hard work.

Sure, but everyone who needs their car repaired today so they don’t get fired tomorrow definitely takes the time to survey all of their local payday lenders, then sits down with a calculator and carefully works out how much each one will ultimately cost them before choosing the cheapest one.

(Hopefully obvious sarcasm is obvious, but one can never tell.)

> Do payday loan customers typically comparison shop?

I'd say that if they were savvy enough to comparison shop, they wouldn't be payday loan customers.

Look at the person in the article, Angela. She started out @ $300 for approximately $75.00 interest (25%). But now she owes who-knows-how-much with a yearly interest rate of 300%! Yet she still thinks she could pay it back!

She did this because she doesn't trust herself with credit cards; the truth should be she shouldn't trust herself to borrow and pay back loans without incurring further debt and higher interest rates.

Had she actually comparison-shopped, she would've found that a credit card - if she could get one - would likely have had a lower interest rate over the same time period, and couldn't rise anywhere near what the yearly rate she has now with the payday loan company.

This is definitely predatory lending; these companies are lending to people who don't seem to have an understanding of certain basic financial concepts, or if they do, they don't have any clue how it will impact them.

It would be a different case if the borrowers all knew that "yes, this is a crap loan with bad interest, but I don't have a choice, and I know I have to pay it back fast or I'm hosed". Some of them do. But I would wager that the vast majority don't, for a variety of reasons, not all of them due to ignorance (I imagine for some there might be some cultural and/or language barriers as well).

These companies are taking extreme advantage of this, to their profit and to their customers detriment.

The really astounding thing are their customers, like Angela, who seem to think all of this happening is a good thing. I just really don't understand this kind of mindset, of borrowing money at any and all costs with little to gain in the end (it isn't like all of these people are borrowing money to make an investment in some manner, to make a larger gain and pay back the loan with extra in their pocket - maybe some are, but I doubt they are in the majority).

If you need an unsecured loan for something you can't afford to pay cash for today, you likely won't be able to afford to pay off the loan for it tomorrow. If you can - then you must. You don't just keep taking out more loans to keep covering the old loans (which is how a lot of these lenders work; the borrower finds they are unable to pay back the loan plus interest when the note comes due, so the lender extends the loan and ups the rate a bit - rinse and repeat until they default).

Yes, typically through word-of-mouth reputation.

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