My Two Cents - "Stacking the Deck"

3/30/2007

Occasionally I receive pieces from readers and listeners of my radio show that address issues that real Americans struggle with on a regular basis. Often, these threads are so relevant that I feel compelled to share them even if there are other issues on my radar. Such has been the case recently as I've had a series of exchanges with a regular contributor relating to how the proverbial noose is tightening around the throat of the American consumer. The latest exchange pertains to a class of loans called quick-cash or payday loans. Payday loans have been around forever, and certainly their existence is not surprising. However, I found it rather noteworthy that recently Congress has begun talking about regulating this once obscure activity. As a general rule, whenever Congress talks about regulating anything it means there is money involved; generally a lot of it.

Andy,
I happened to catch one of your recent Internet radio broadcasts, and it was very informative, as well as entertaining. You happened to be talking with a caller, and mentioned that from what you can see most middle class workers whatever business they are in seem to lack the knowledge to really understand where to begin getting information to make changes. Those changes would be streamlining their finances, eliminating costly credit debt, and seeking tools to start investing. I myself have gone through many conversations with you via email and in person. I can say that from a year ago, my knowledge has grown but I’m nowhere near feeling like I have a handle on all the avenues that can be explored. So I try to at least keep going by watching the news, and catch a few business news shows occasionally. But first, and foremost, I rely on the old way of thinking that debt as a way of life should be avoided at all cost. Actually I should rephrase this: having to rely on credit outside of buying a home, vehicle, or education is a poor financial choose that can be costly and have detrimental effects on a family's well being. The statement you made to your caller and I’ll paraphrase here a bit, “someone can turn on any of the national cable news shows regarding the economy and personal wealth, and watch for a few minutes. They will be subjected to loads of stock acronyms, and rising and falling percentage points, and technical jargon....So then they turn the news off, feeling frustrated since the are no better informed than the were shortly before.” This is very true, there has been countless times where I have seen something, not understood it and had to comb through other sources to try and figure out what they meant. Sometimes I’m successful, and other times I end up with even more questions that I send your way for a little clarity.

Recently there was an article written by an Associated Press reporter, which brings in a whole new perspective to the area of credit pitfalls. When most people think of debt they immediately throw out the following, credit cards, mortgages, car loans, etc. These are the big tickets that get all the attention in the media. Well I realized from reading this article that there was another aspect that many never think about, and I don’t recall you’ve ever mentioned in a column. Quick cash lending, or Payday loans are some of the highest interest loans, and the quickest to send someone into a financial tail spin if they accumulate. I’m sure all of your readers have heard about them at one point or another, or driven past a quick-cash establishment. From the looks of it they are the easiest legal way to get quick money. As long as you have a checking account, government issued identification, a smile and a promise to pay the money back in 2 weeks then anything is fair game.

Now that this is becoming an issue being taken up by local and state governments to legislate fixes for a problem, the news coverage will likely increase, but the fact remains there is still a demand for this service. Legislation will indeed protect some by placing caps on interest or the number of loans that an individual can have with one lender, but that may do very little to calm the demand for this form of credit. Much like some spenders who bounce from credit card to credit card looking for the best rates, or just keep opening new accounts. I'd be curious to hear your thoughts on this.

Chris,
The payday loans you are referring to are granted to someone who typically needs cash for a very short period of time, usually a week or two. These are also called ‘piggyback’ loans also as they bridge the gap between the need for cash and the next paycheck. The interest rates on these loans can be ridiculous and the person taking the ‘loan’ ends up signing over a significant portion of their paycheck to satisfy the interest. The APR on a typical $200 loan can be as high as 400%! These types of loans have been around for a long time. This service addresses a very real need: people that have zero reserves and need cash quickly. Makers of payday loans say they are providing an emergency service to people who are temporarily short of cash. Analysis of the statistics by the Center for Responsible Lending shows the majority of payday loan borrowers have multiple loans each year. Two thirds of borrowers have five or more payday loans annually and 50 percent of these have 12 or more payday loans annually. Only 33% of payday borrowers use four or fewer loans. Some borrowers may also borrow from two or more payday lenders, multiplying the potential for getting trapped in perpetual debt. Unfortunately, there are a growing number of these folks, and the industry is beginning to make some real money. This is typically when the government decides to get involved. In all likelihood, government intervention will only steer these people towards more ‘official’ types of debt like credit cards. Legislation will only put regulations on the lenders, but will do nothing to address the underlying decaying economic conditions that have allowed these lenders to prosper in the first place. Payday lenders often operate on the fringes of the financial system and history has shown that to be a huge no-no.

These businesses are in existence and bank on the fact that people have little or no reserves. I guess the bigger question becomes how does a person build a nest egg while they’re behind the 8 ball on a monthly basis? I sure don’t want to be the one to tell people they should work more. There are only two ways to change this. You have your revenue side, which is your labor. Then you have the cost side which is your living expenses. That said, I guess we’re looking at the expense side of the ledger. I know I'm going to take some flak for this, but I'm going to say it anyway. People are really going to have to examine their lifestyles and separate needs from wants. Too often, we feel we 'need' things, when in fact, we only 'want' them. This is not semantics here, but a very real difference. Anyone looking for information on this can type "Maslow's Hierarchy" into their favorite search engine. Maslow had the right idea in terms of economic wants and utility, even though he is more famous for his work as a psychologist. The choice is either a serious self-examination of needs or relying on debt to live. Unfortunately, society has placed far too much stigma on the former and been far too cavalier with regards to the latter.

Programming Note: Tune in to Beat the Street next Saturday evening on Blog Talk Radio. I will have CJH, the author of several Guest Commentaries on for an in-depth discussion of how macroeconomic events boil down to the average person's existence. We will be taking your calls and emails from 7-8 PM EDT. Find out more information on this and all my weekly episodes at: http://www.blogtalkradio.com/my2cents

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.