The Motley Fool presents a business/stock market look at recent payday advance ruling …
We’re only one month into 2007, and already, 19 states have introduced more than 50 separate pieces of legislation regulating the payday loan industry. While some of the current bills are holdovers from last year, state legislators are well on their way toward matching the 65 separate bills introduced last year in 25 states.
You can perhaps understand the animosity towards alcohol and tobacco companies. Yet fast payday advance lenders provide a much-needed service to a large swath of the public that has been completely abandoned by traditional financial institutions.
A short-term bridge over troubled water
Credit counselors charge that the interest on payday loans is usurious. For example, Advance America charges $15 on a 14-day $100 loan; extended out to a year, that’s an annual percentage rate of 391%.
The typical annual percentage rate for a guaranteed payday loan from a Dollar Financial Money Mart store is 456%, while Cash America’s $25 fee per $100 borrowed would be equivalent to a 651% APR. To fiscally prudent people, this is not only outrageous, but predatory.
Yet such arguments distort the nature of these personal loans.
Many of the people who use these services are considered a credit risk by banks, credit unions, and other financial institutions. Those businesses wouldn’t even give these people a bridge loan, let alone charge a rate that wouldn’t be considered usurious. These consumers have become what is known as the “unbanked” or “underbanked.” In fact, they may not even have poor credit histories - they simply don’t have any at all.
Serving the underserved
For a variety of reasons, many of the consumers lack checking or savings accounts, and cannot obtain credit card cash advances. Many cash loan customers are recent immigrants. EZCORP, for example, is based primarily in and around Texas, and has found that many of its customers are Mexican immigrants.
Because the use of payday services in Mexico is not as stigmatized as it is here, it’s even more of a growing business south of the border, and EZCORP has expansion plans there.
While no faxing payday loans are the bread-and-butter of these businesses, they’re often not the sole source of revenue. These lenders often cater to the full range of the underbanked consumer’s needs, and many also operate pawn shops, where merchandise is put up as collateral for a small, short term loan. Some also provide low-limit credit cards and buy-here/pay-here auto dealers.