Payday loans during economic downturns
June 1, 2008 | industry | Comments (0)Too often media reports assume that payday lenders benefit from economic downturns. Research is unclear as to what the impact on the industry is during such times. Blogging Stocks writer Zac Bissonnette points out some inherent contradictions between political and investor views of the payday industry. This excerpt is thought provoking:
“The earnings strength of payday loans is untested in a tough economic environment, when borrowers who lose their jobs default on the loans,” according to The Journal. “And the business has come under increasing fire from state legislatures and consumer groups, which contend that the fees on these uncollateralized loans often amount to interest rates of as much as 400% a year.”
The contradiction here is remarkable, and the Journal doesn’t point it out: investors are worried that payday lenders are running the risk of defaults high enough to wipe out the profits from high-interest loans. Meanwhile regulators and consumer groups are accusing the companies of charging outrageous interest rates. But which is it? If the high “interest” on the loans isn’t enough to overcome defaults, then the interest rates aren’t high enough! Perhaps this explains why none of the big banks offer payday loans.
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