Did you think payday lenders were bad? Welcome to Internet Lending.
A new law that came into effect this year aims to protect Virginians from “predatory” short-term loans by limiting what lenders can charge. And in honor of National Consumer Protection Week, Attorney General Mark R. Herring is encouraging Virginians to familiarize themselves with the risks associated with smaller loans and great features.
I am all in favor of consumer education and am happy to see that the GA office is vigilant against fraudulent loans. But I cannot escape the concern that the charitable instinct of the political class to “help” the poor by regulating one of the few industrial sectors willing to lend them money may do them more harm than harm. good. The regulation of payday lenders pushes the poor into the arms of online lenders.
In a press release released today, the GA’s office reported some interesting figures regarding the reach of payday loans. Citing data from the Bureau of Financial Institutions’ 2019 annual report, the press release notes that 83,107 Virginians have taken out 268,097 payday loans totaling nearly $ 110 million with an average annual percentage rate of 253%.
It sounds awful. The poor trapped in a cycle of debt and poverty, and all that. If there is any fraudulent misrepresentation involved in short term loans, the GA office should crack down. No one wants liars and cheaters in the market. But the more relevant question is whether the regulation of loan terms and conditions really helps the poor.
In 2019, the average loan amount made by payday lenders was $ 413 with annualized interest rates ranging from 4% to 818%. Herring’s press release urges consumers to consider alternatives to “predatory” loans such as borrowing from banks and credit unions. Good luck with that! Banks are not interested in small value loans, which are expensive to create and process. Also, how many of the poor looking for payday loans even have banking relationships? Wells Fargo requires a minimum opening deposit of just $ 25 to open a checking account – but then charges a service fee of $ 10 per month!
Payday loans are predatory, but checking accounts are not?
Consumers can avoid the monthly fee if they maintain a minimum daily balance of $ 500. Awesome. If the poor have $ 500 in their bank accounts, they wouldn’t need that $ 413 payday loan, right?
The GA office also suggests taking out a cash advance by credit card. Yeah, okay, like the poor are too stupid to figure that out for themselves. I guarantee you the overwhelming percentage of payday borrowers don’t have credit cards or have them maxed out.
Here’s the problem with lending money to the poor: They often default and the lenders don’t get their money back. When lenders make loans to categories of people who do not repay them, they have to charge higher interest rates to compensate for the risk. Otherwise, if they lose enough money, they go bankrupt. This is a fundamental tenet of finance – a reality that only politicians could ignore.
The Bureau of Financial Institutions provides useful data. While payday lenders in Virginia advanced $ 111 million in loans in 2019, they also charged $ 6.5 million as bad. So from the start, payday lenders had to charge about 6% more on an annualized basis just to offset the risk of non-payment.
Then there is the issue of administrative overheads. A loan of $ 400 costs as much to process as a loan of $ 4,000. Do offices need to be maintained, rent paid, employees paid, and lawyers paid? Lawyers? Yes, payday lenders in Virginia have sought to recover nearly $ 2 million in loans from 2,752 borrowers through lawsuits.
If payday loans were a lucrative business, one would expect more lenders to enter the market for a share of the action. But that’s not what happened in Virginia. According to the Bureau of Financial Institutions, between 2016 and 2019:
- The number of payday lenders licensed to operate in Virginia has increased from 18 to 15.
- The number of sites operated increased from 171 to 152.
- The total amount of loans granted increased from $ 326 million to $ 268 million.
- The number of borrowers increased from 102,000 to 83,000.
The payday loan industry has shrunk. And it will continue to decrease. the new law caps the interest and fees that can be charged on a short-term loan at an annual rate of 36% plus maintenance fees, and sets the loan term at a minimum of four months. Fees and charges cannot exceed 50% of the original loan amount for loans under $ 1,500.
These ceilings will be very restrictive. According to the Bureau, the average length of salary was 44 days. Interest rates ranged from 34% to 818%.
Where do the poor go when they are in desperate need of money, they have no banking relationships, their credit cards are depleted and their friends and family don’t want to lend them money because they don’t think that they will get it back? They go online. There you see search results like these:
$ 400 – $ 5,000 Online Loans – No Credit History Required
Quick Loans For Bad Credit – Do You Have Bad Credit? No problem.
Instant Approval / Bad Credit OK – No Credit Check Loan
Does that sound trustworthy to you? No, I do not think so.
It is estimated that 16% of Americans – almost one in six – have a bad credit score (below 580). For all practical purposes, these people do not have access to conventional sources of credit such as banks and credit cards. As the payday industry disappears, their only recourse is the wild west of online loans.
Unsurprisingly, Herring and his team have focused in recent years on online lenders, which the press release says represent a growing share of the small loan market. If you thought traditional payday lenders were bad, it turns out that online lenders are really sketchy. The AG’s Predatory Lending Unit has recovered more than $ 45.9 million in restitution and canceled debt from online lenders. I doubt that’s what the authors of the payday loan legislation had in mind, but I expect Virginia to see a lot more.