The Finch Formerly Known As Gold

1 September 2006

The Pentagon takes interest

So-called "payday-loan" and "cash-advance" places dot the urban landscape: the local Feist Yellow Book has nine pages under "Loans," and while actual banks and traditional finance companies are listed, generally in small print, the big ads are for small-time operations with big-time interest rates. I have no idea how trustworthy this bunch is, but I am not heartened by things like a half-page ad listing four companies who turn out to be at two addresses: each location has two offices, apparently differing only in name.

The Department of Defense has been looking into these joints also; they estimate that 17 percent of military personnel have used these companies for quick loans. And it's not hard to understand why: most of the troops are young and inexperienced in financial matters, and they're not what you'd call especially well-paid: starting pay at grade E-1 (FY 2006) is $1178.10 a month. (This is five and a half times what I made as an E-1 in 1972, but it's still not an enormous sum.)

Defense, therefore, would like to curb this sort of thing, and there's no money for giving the troops a huge raise, so the next-best thing is to cap the interest rates charged by lenders. The example in the AP story: fellow writes $300 check post-dated two weeks, gets $255 cash. I look at this and I think, well, $45 is not that big a finance charge, but then I do the math, and the annual percentage rate is around 400 percent.

The cap sought by the Pentagon is an APR of 36 percent, about what you'd pay on the worst credit cards, and a House/Senate conference committee is considering such a measure. Would such a cap drive these firms out of business? Warren Bolton of The State (in Columbia, SC, home of Fort Jackson) thinks so:

In 2004, the Department of Defense asked states to support 10 key issues that would improve the quality of life for service members. One of the 10 was to prohibit predatory payday lending. So far, 11 states have made changes that outlaw triple-digit interest rates for payday loans: Connecticut, Georgia, Maine, Maryland, Massachusetts, New Jersey, New York, North Carolina, Pennsylvania, Vermont and West Virginia. “These states have been successful in maintaining strong usury laws and aggressively enforcing those laws,” the Pentagon report said.

That’s certainly true in North Carolina and Georgia. North Carolina has a 36 percent annual percentage rate usury cap for small loans. In Georgia, lenders can’t exceed a 60 percent annual percentage rate. Both those states have shut payday lending down.

Oklahoma legislators introduced two bills this session to cap lending rates to service personnel at 36 percent. Senate Bill 1920, by Daisy Lawler (D-Comanche) and in the House by John Carey (D-Durant) died in the Finance Committee, as did SB 1062, by Mary Easley (D-Tulsa).

The industry itself points out that sometimes the alternatives could be worse:

Payday advance APRs are often lower than customers' alternatives (on the same 2-week term)
  • $100 payday advance with $15 fee = 391% APR
  • $100 bounced check with $48 NSF/merchant fees = 1,251% APR
  • $100 credit card balance with $26 late fee = 678% APR
  • $100 utility bill with $50 late/reconnect fees = 1,304% APR

The problem, though, isn't the one-shot triple-digit APR: it's the spiral of rollover loans that follows when the borrower discovers that he isn't quite caught up just yet.

Still, for all the presumed "predatory" nature of these firms, they pale next to the rent-to-own outfits, the only places in town where you can still buy a low-end PC for $2,000. It's enough to make you yearn for a layaway plan.

Posted at 10:23 AM to Common Cents

Best advice ever received from an NCO: "keep your pen in your pocket."

Seeing these places first-hand really makes one angry. But again, most of the "I want it, and I deserve it now" attitude of most of these "junior enlisted" [and, sad to say, of more senior ranks who ought to know better] is driven by the laxity of their parents when it comes to proper monetary education. No self-discipline. No future-thinking with regards to saving. Only the immediate gratification and who-cares-if-I'm-in-debt-slavery mentality.

OTOH, the "exorbitant" rates cover the default rate. These places charge-off millions every year from deadbeats.

Maybe a better idea is to have the debtor watch a "disclosure video" and wait 24 hours before signing.

I'm with you on the rent-to-own business. Pure-D ripoffs.

Posted by: John Owen Butler at 3:47 PM on 1 September 2006