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Comment by nordsieck | Hacker News Reader

I think "Microfinance is a scam" oversells the claim.

The truth is much closer to "Microfinance is payday loans". To the extent that you believe payday loans can help the poor in the developed world, microfinance can also help the poor in the developing world.

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Many if not most people believe payday loans are predatory practices that prey on people without access to capital and/or financial literacy.

That's certainly true in American cities, where they are made to desperate people devoid of options for a whole host of reasons (systemic racism, regulatory capture, supply-side economic, etc.) Those conditions don't necessarily apply to impoverished countries where microfinance organizations target. They've got other problems, so microfinance may or may not work, but they're really not comparable to payday loans in the US.

Payday loans are also much shorter term. They're not intended as investments, even when they're not actively fraudulent. They're supposed to stave off literal starvation for people with unreliable income. Presenting them any other way is fraudulent, and people are often trapped in them by people who knew that they could not be paid back in time (and the compounding interest would claim everything they own).

The US was working on regulation to limit fraud in payday lending while still trying to keep the aspect of trying to even out inconsistent income. That was in 2016, and I think the new administration killed that.

> The US was working on regulation to limit fraud in payday lending while still trying to keep the aspect of trying to even out inconsistent income. That was in 2016, and I think the new administration killed that.

I think it was very successful if you consider it a delaying tactic to preserve payday loans with a voter base who mostly sees giving extremely high interest loans to people attempting "to stave off literal starvation" as exploitative on its face.

People who are literally starving should be turning to a safety net. If they are an investment opportunity, your society is broken.

I'm not even sure I see the economic viability of payday loans/microfinance even in the best case. Certainly not if you are running a private business based on that. If unreliable income caused you to need a loan in the first place, I'm not sure how a usually high interest loan helps in the long run. So maybe they are not intentionally scams but the outcomes are very much the same

The problem with payday loan companies is that they give access to loans to people who cannot pay any type of loan back. If they had enough money to pay e.g. their credit card bills then they wouldn't need a pay day loan in the first place. Most payday loan companies have a smaller borrow limit most credit cards or even regular bank accounts in europe.

Now imagine you are running a company that is making a profit by lending to people who cannot pay their loans back. Isn't that impossible? Shouldn't your company lose a lot of money because it's handing out money but never getting it back? You are forced slap on all the lost money as extra fees on top of the loan itself.

People who believe that are ignorant of how much it costs to provide payday loans, or micro finance. They should be focused on increasing competition and offering the poor better options instead of just banning them.

> Many if not most people believe payday loans are predatory practices that prey on people without access to capital and/or financial literacy.

Sure.

And I think the same logic also clearly applies to microfinance.

So you’re objecting to equating “predatory practice” with “scam”? A bit pedantic?

> So you’re objecting to equating “predatory practice” with “scam”? A bit pedantic?

scam (n): a dishonest scheme; a fraud.

A scam necessarily involves dishonesty of some kind. It may be that some payday loans are also scams, but the vast majority of them are above board and disclose their terms clearly.

On a relative scale on the context of local economy, microfinance is more like a mortgage or SBA loan.

I don't know that most people would specifically call a legit payday loan a scam. Perhaps just a really bad practice that is legal.

I do however call into question the selling the term "microfinance" and its "mission to help" a scam against the people that backed it. Sure.

Just read that the payday loan default rate is 6% same as credit cards? Which is extraordinary.

Wonder why a company wouldn’t offer to advance paychecks to workers, take a say 3% fee to pay 2 weeks early and pocket that fee.

Payday loans are a predatory scam.

Yup, but at least they're better than the black market alternative. :)

I'd know what exactly you are referring to but if we assume that the black market alternative also gives you access to money then payday loans create further demand for black market alternatives because they leave people worse off than before.

No, because the payday loans are still available to people who already used payday loans.

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