“Fair and Reasonable” rates
October 13, 2009 | federal legislation, industry | Comments (0)But we always knew that. From a FISCA news release:
In order to address unsubstantiated claims regarding the cost of small, short-term loans, also known as payday advances or loans, Financial Service Centers of America, Inc. (FiSCA) engaged the firm of Ernst & Young LLP to perform an economic survey analysis of the cost to provide consumers with this form of credit through stores that offer many other financial products as well (also known as multi-line operators). The data obtained through this nationwide survey of FiSCA members clearly illustrates that payday loans are priced fairly and reasonably for consumers seeking small dollar, short-term loans to address unexpected financial shortfalls.
Further, based on the study’s findings, it is reasonable to conclude that imposition of arbitrary fee caps will cripple an industry that operates responsibly under a variety of federal and state regulations to provide this form of credit to millions of cost-conscious Americans.
Among the findings of the Ernst & Young study:
- The average revenue for multi-line payday advance lenders for every $100 loaned is $15.26. At the same time, the store-weighted average cost to lenders equaled $13.89 for every $100 loaned.
- On a pre-tax and pre-interest basis, multi-line payday advance lenders earn an average profit of $1.37 per $100 of loan principal issued – that represents a modest margin of 9.1%, before taxes.
There are no collateral requirements for a payday loan, so lenders in this industry face a much greater risk than lenders offering loans requiring some form of collateral. According to the Ernst & Young report, the store-weighted average bad debt costs equaled $3.74 per $100 loaned, or 26.9% of the total cost of each loan issued.
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