A post in the Washington Times this morning concerning Connecticut’s Republican candidate for governor Bob Stefanowski’s previous business ventures caught my eye. I wrote about payday loans previously about eight years ago, so I thought I would revisit the subject.
Stefanowski led DFC Global Corp. in Pennsylvania for a couple of years during 2014 and 2016. DFC Global provides financial services – short term loans and other services – to “unbanked and under-banked” consumers. When pundits refer to “payday loans” it’s in-part reference to unsecured short-term consumer loans. These are the type of loans your local bank is normally not interested in providing.
No matter what you hear from the pundits, the short-term, unsecured loan market is regulated by the federal government and individual states where they are legal. The other important aspect is there is a demand for loans less than $250 for days or a couple of weeks.
There are many who will heavily criticize Stefanowski for “taking advantage of poor people.” Others will point out payday loan outfits provide a needed service to a community not being served by traditional financial institutions.
In Connecticut, payday loans are pretty much illegal. The state legislature ensured that by capping the interest rate at 12 percent. If you need $200 to cover your car payment for the next week until you get paid – hence the term payday loan – you’re totally out of luck. There is not a financial institution in the state who will help you. The risk is way to great for a return for a profit of about 53 cents. ($200 at 12 percent for about one week.)
I took a look at the website for a large payday loan outfit in Florida. It took me about three minutes to locate their finance charge schedule. The first think you’ll notice is the annual percentage rates … they are between 286 and 521 percent. If you have moral objections to these interest rates, that’s fine. But I’ll ask you to take a closer look.
In Florida, the amount financed can be as little as $50, and up to $500. If you need $300, you’ll owe $335 in two weeks. (That’s a 304 percent interest rate.) You’ll need to meet certain qualifications and present some required items to get the loan, but you’ll get the money you need. The loan term is between 10 and 31 days. Again, these are short-term loans.
As I mentioned, I wrote about payday loans almost eight years ago. I’ll use the numbers above for another example.
… let’s say you have to make a $300 car payment today, but you will not have the money to pay the debt until your next paycheck coming in two weeks. We’ll lay out two options for you.
Option 1: An offer of a $300 loan – due in two weeks – that you will have to pay a $35 to get. (Total cost $335)
Option 2: Car most likely repossessed within the next 14 days.
What would you do? If you morally object to the $35 interest charge, what would your advice be to that person? Be honest with the answer. If you morally object to the rate paid, would you be willing to invest in a company offering financial services to underserved customers at an interest rate you find morally acceptable? What would that rate be?
Below is the video I included in my previous post for reference. Some information may be out-of-date.
Note the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 – passed and signed four years prior to Stefanowski running DFC Global – gave the Consumer Financial Protection Bureau the power to oversee financial products and services, including payday loans. (They really did not start implementation until 2012.) President Obama promised he would limit payday loan rates to 36 percent. Although some sources say he kept his promise, those same sources note…
It’s worth noting that the 36 percent interest cap, something Obama specifically cited in this promise, is not included in the new agency’s purview.
Nice how the “fact finders” lie is it not?
Final comment. There has been plenty of discussion and articles concerning the Trump administration’s proposed changes to the federal act passed in 2010. Sorry, but I just do not have time to dive into any of that.