Paige Skiba (Vanderbilt Law School) and Jeremy Tobacman (Oxford), "The Profitability of Payday Loans":
Payday loans provide households with expensive, short-term liquidity. This paper studies the profitability of payday lending using standard financial data from CRSP and SEC filings and loan-level data from a payday lender. Despite charging e¤ective annualized rates of many percent, we find lenders' firm-level returns differ little from typical financial returns. The data are consistent with an interpretation that payday lenders face high per-loan and per-store fixed costs in a competitive market.
I'd bet a similar analysis applies to the rent-to-own industry.
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Payday loans
This afternoon, let's just do "Control-C" from Craig Newmark:
Posted by Tyler Cowen on February 22, 2008 at 12:23 PM in Economics | Permalink
Comments
I have a relative who went into the rent-to-own industry a few years back, and he is making boat loads of money. It is so profitable, he is giddy. He got several of his friends to open stores as well, and they are making far far more money than they ever have before. My sample size is small, but anecdotally the rent-to-own industry does not seem to be as competitive as the payday loan business seems to be.
Posted by: D at Feb 22, 2008 12:34:31 PM
If we make it illegal to give loans with extremely high interest rates, then only criminals will give loans with extremely high interest rates. :x
Anyone who doesn't believe this proposition need only look at recent history before "organized crime" got whacked. By the way, I think the real reason that organzied crine is mostly in the realm of history (in the US anyway) is precisely because we've legalized enough of their former turf and thus the revenues aren't enough to cover the costs (e.g. hiring goons, payola to the police and politicians) combined with the risk of prison.
Making it illegal thus actually makes things worse for those on the left side of the curve who (foolishly!?) use these services, noting the mob has nastier collection methods and inspires their vitcims to commit crimes to get out from under their thumb.
So, since the profit margins for this business seem to be unremarkably median-like (as theory suggests any highly visible business with low entry costs would have), can we all please simply stop whining about legalized loan sharks? No, I didn't think so.
Posted by: happyjuggler0 at Feb 22, 2008 12:47:53 PM
D,
Theory suggests that if people like you keep making posts like that, and if the media cover it more (thus pointing out the profts margins), then your friends returns will eventually revert to the mean as competition piles in. They may as well enjoy it while it lasts.
By the way, "we", and by "we" I mean society, should encourage more people to enter this industry, not less, for precisely the reason I listed above. Knocking down profit margins via competition, as opposed to legal costs, makes the customers better off (or less worse off) via lower prices.
Posted by: happyjuggler0 at Feb 22, 2008 12:53:19 PM
D's anecdote is small. I'm curious about geographic variation in all of these findings. These businesses are heavily influenced by demography and geography.
Posted by: step2D at Feb 22, 2008 1:28:51 PM
The most financially abusive business I have noticed are the low quality trade schools that advertise heavily on television for careers in fashion design, computer animation, etc. At least in the old days, they were pushing diesel mechanics training. This stuff is being funded by student loans - which can't be discharged by bankruptcy.
Meanwhile, much higher quality training is available at junior colleges. There has been some press about this, primarily the Culinary schools. People are graduating with thousands in debt and are only able to get low wage jobs.
Posted by: Ziggurat at Feb 22, 2008 3:55:45 PM
This adds nothing relevant to the commentary, but your verb 'Control-C' (followed by a Control-V I assume) means 'kill foreground process' (the one you're working on) to any UNIX geek. Gives a slightly different first impression. Just sayin'.
Posted by: The 4th Horseman of the Internet Apocalypse at Feb 22, 2008 4:22:24 PM
T4HofIA
More specifically, it sends an interrupt signal to the controlling process
rdrr :)
Posted by: anomdebus at Feb 22, 2008 7:07:30 PM
That payday lending is a competitive industry does not imply that it is socially beneficial one. Personally I have no opinion about the effect of payday lending reduces social welfare. Wouldn't it be nice to have a randomized experiment which outlaws it in some cities?
Posted by: Michael Bishop at Feb 22, 2008 7:48:45 PM
FWIW, there are huge regulatory differences from state to state. There might be a few natural experiments in there already.
Posted by: Bernard Guerrero at Feb 22, 2008 10:56:27 PM
Percentages can be misrepresented just like other numbers. If my return on assets in 10% that's pretty high. But if it represents only $1,000 and I have to live on that for a whole year, it's not that great. You have to look at absolutes and percentages. The do-gooders love to distort the facts. And the media loves it, too.
Posted by: jorod at Feb 23, 2008 2:57:59 PM
Suppose we found out that dealing drugs and prostitution were average margin enterprises (we did, for some values of participating in these trades, with Sid Venkatesh's work, referred to in Freakonomics).
This wouldn't make them any more morally desirable, would it?
Similarly with taking advantage of the poor to make a buck yourself.
That said, this reminds me of Tyler's post and article on 3rd world micro-credit: it's not cheap, it's just less exorbitant than organized crime, and with less likelihood of bodily harm.
Posted by: ZBicyclist at Feb 25, 2008 6:38:48 PM
I think pay day loans should be allowed for those that want to use them. For example: I have no credit cards, and not outstanding loans other than the house that we live in. The pay day loan comes in handy to me several times per year because I use it to offset NSF fees should my checking balance get low due to an unscheduled purchase that eats up too much of our monthly disposable income. So rather than pay the bank $33 for covering three small checks that are within the $550 dollar overdraft limit. I can borrow $300 for a $50 fee for a full month. So 3 overdraft checks would equal $99.00 but to borrow $300 and deposit it in my checking account to cover the three check without having to pay the three NSF fees, I actually save myself $49.00 ($99.00 - $50 (for the loan)]. We have one debit card and that is it, so the payday loan works great for us when we need it. If I need a larger loan I can borrow from my 401K at 6.5% interest, otherwise we have learned to live comfortably within our means, with a little help from Mr. Payday Loan from time to time.
Let adults make adult decisions about their finances. If you really want to cause a fuss, find out why a bank should have to charge $33.00 for a $15.00 NSF check that they are willing to pay for! I guess that seems reasonable for people who are against the payday loans.
bill
Posted by: Bill at Feb 29, 2008 7:13:15 PM
Payday loans are good option when your credit score is not up to the mark and things certainly become a bit difficult
Posted by: payday loans at Apr 18, 2008 4:38:11 PM
Payday loans are a good option for someone that doesn’t want to get caught up with credit cards debts. They can also help in a tight situation, its quick, and most places are open longer hours than banks.
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Posted by: Ed-U-Can at Jul 7, 2008 9:25:24 PM
I agree with Bill. Payday loans should be used by people who want to, by adults who are capable of making their own rational decisions, people who are responsible.
Payday loans are invaluable resource for those times you find yourself in a financial bind.
For example, think of your child who just came home from school the other day and told you they need a physical to play sports; and the first practice is only two days away.
In this situation, you can take out a no fax payday loan, instant payday loan, online payday loan or bad credit payday loan to cover the cost of the physical. Not to mention, they're great whenever spur-of-the-moment expenses might crop up right in the middle of seemingly endless gaps between paydays.
You never know when something is going to happen. Be prepared with faxless payday loans or cash advances. http://personalmoneystore.com/moneyblog/
Posted by: no fax payday loan-david at Aug 13, 2008 7:22:11 AM
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Posted by: no fax payday loan-david at Aug 18, 2008 2:50:28 AM
Television portrays cultures in a fictitious way, dismissing the reality that it is not conductive to our progressive society. Extensively, communities such as Gays and African Americans have fought for the same equal treatment that has been taken advantage of by the majority, only to find their efforts descent by stereotype-promoting dramas and situation comedies. There are many individuals who do not believe at least most of the traits of characters who are based off of stereotypes from shows such as Good Times, Sanford and Son, and Will and Grace. Although our society has come a long way in its acceptance of people from all backgrounds, our entertainment has yet a long way to go. Let’s take the new CW television program for an instance. The TV show, “Easy Money,” is scheduled to premiere on Sunday, October 5, where they criticize their next target; payday loan companies. It portrays a similar objective as Sanford and Son and Will and Grace, airing a show that speaks about the industry in such a tedious way allowing our society to acquire a distorted picture of a legitimate business model. This could definitely lead to extreme measures such as Ohio’s HB 545, which will result in thousands of lost jobs and a further devastated economy. This provides additional proof that we can’t rely on Hollywood to learn about the world around us.
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Posted by: Payday Loan Advocate at Oct 11, 2008 1:21:49 AM
David Kernell, the 20-year-old son of Democratic Representative Mike Kernell of Tennessee, got busted. According to CNN “Democratic lawmaker's son indicted in Palin hacking”, David reset the password and gained access to GOP vice presidential candidate Palin's personal e-mail account. Supposedly, David read the content, took a screenshot of Palin's directory, and also attained other private data. Some of the personal information that may have been accessed from Palin's address book includes e-mail addresses, family photos, family cell phone numbers, family birthdates and more. However, despite turning himself in, David Kernell pleaded not guilty. David pled not guilty even though he had allegedly hacked Palin's account and posted the content onto a public web site. David also posted the new password he created for Palin's account onto the public site, which would allow others easy access to Palin's e-mails as well. Consequently, David Kernell could face up to five years in prison, a $250,000 fine and three years of supervised release. At the maximum of $1,500 per loan, David’s bail would require approximately 167 individual payday loans.
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Posted by: Payday Loan Advocate at Oct 13, 2008 1:07:50 AM
After turning himself in to authorities, 20 year old David Kernell, son of Democratic Representative of Tennessee, Mike Kernell, is facing five years in prison, a $250,000 fine and three years of supervised release. He will be charged for hacking into GOP VP candidate Sarah Palin’s personal E-mail account. It is alleged that after reading the contents, he took a screen shot and posted it on a public Web site. The contents included email addresses, pictures, birthdays, and phone numbers of family members and more. To top it off, after resetting the password, he also posted the new one he had created, which allowed others to access the E-mail account themselves. Nonetheless, Kernell pleaded not guilty to the charges. Facing a $250,000 fine is intense. At $1,500 per loan, it would take about 167 individual payday loans to cover that outrageous expense.
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Posted by: Payday Loan Advocate at Oct 16, 2008 4:43:35 AM
Most lenders do not charge applicants a fee to qualify for an instant payday loan. The charges of instant payday loans vary across the value of the loan, just like in the case of all other loans. As an example, in case of an instant payday loan of £200 loan for up to 15 days, the charge would be approximately £60. The payment options available for most fast payday loans are quite flexible and are customized to suit your requirements. To get short term payday loans you need to give an authorization to the company that is giving you the loan, to deposit the amount in your account and to collect the same day cash loans amount and the loan fee on your next pay day.
Cheers,
Prepaid Mobile
Posted by: PnM at Oct 17, 2008 1:15:31 AM
The probability of payday advance companies burning up in flames would make the Arizona Credit Union System very happy. Yet, their opinion is only marked by means of their own preference. The credit union is taking the next big step to wipe out the competition and draw all the former cash advance customers into their grip. In an E-mail campaign which is estimated to reach about 1.6 million credit union customers, System will encourage voters to reject Proposition 200. In contrast, organizations such as the Arizona Community Financial Services Association are supported by Prop. 200 that claim that the Proposition will eliminate extensions by introducing flexible payment plans, lower state loan fees, and will not only regulate Internet lending, but control the number of walk-in stores in Arizona. This resolution will help payday loan customers and keep industry employees away from the unemployment binge. No one wants to lose their jobs, particularly in our current economy.
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Posted by: Payday Loan Advocate at Oct 20, 2008 6:34:23 AM
The eyes of the American nation were fixed upon Hempstead, New York, on Wednesday, October 14th, 2008, for the third and final U.S. Presidential Debate. The Democratic candidate, Sen. Barack Obama, of Illinois, went into the debate with an eight point lead, and he was indeed content with it. The Republican candidate, Sen. John McCain brought it hard to his opponent, challenging his expertise, character, judgment and proposed policies. Obama’s position on the economic policies of the last eight years was far more critical than McCain’s, though he maintained that he is “not President Bush.” Both pledged that they would make cuts in the federal budget, McCain pledging to enact an “across the board spending freeze,” and take a hatchet to some programs whilst using a scalpel on others. Obama’s take was to “go through the federal budget page by page, line by line” in order to cut out those programs that are dysfunctional. Both of the candidates pledged to bring the change that America needs, but what does that mean? For instance, many politicians want to do away completely with the payday loans industry. Should they succeed, it will mean the end of the freedom to choose for the consumer, and the triumph of certain interest groups (the banks and credit unions, who have gotten themselves in enough trouble already) over the freedom of we, the American People. Post Courtesy of Personal Money StoreProfessional Blogging TeamFeed Back: 1-866-641-3406Home: http://personalmoneystore.com/NoFaxPaydayLoans.htmlBlog: http://personalmoneystore.com/moneyblog/
Posted by: Payday Loan Advocate at Oct 22, 2008 2:31:41 AM
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