Posted on25 June 2009.
An alert reader saw this column about a payday loan “alternative” in the Cedar Rapids (Iowa) Gazette:
The bank loaned a total of $50,000 at 12 percent interest for terms of one to three years — compared with payday lenders’ two-week loans at an annual interest rate of 300 percent or greater.
As usual, no information about the term length, fees, or other restrictions. In any case, let the consumers decide.
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Actually, the article states that they the have loaned $50,000 at 12% for terms of 12-36 months. Based on the article, all that they have done is loan the money with no history of repayment to “justify” the viability of the product. If they can make money on these types of loans with no subsidising, then why is no one (banks, finance companies) that truely understands the risk offering this product?
Didn’t the article say that a bank was actually providing the loans? And what is it about this loan that makes you doubt the viability of the product because consumers won’t repay, if you have no doubts about the ability of consumers to repay a payday loan?
Basic numbers will tell you why the product will fail. If you loan a person $1000 at 12% APR for 12 months, the profit on this will be $10 per month or $120 per year. I know of no business model that will succeed without a staggering number of loans on the street. If you have one of these $1000 loans go bad, then it will take 8.33 new loans just to make up the lost principal and you have lost the profit on the new loans. It is a perpetual motion that will lead to failure. If your profits cannot support your expenses and defaults, your business fails.
The payday loan model has taken into accout the real world where a few of your customers will default, that is why we do not charge 1% per month.
It is a nice idea, but nowhere realistic in the business world.
As the Pundit mentioned, the article makes no comment about hidden or junk fees. Walk into any PDL store and all the fees are clearly posted.