Are Payday Loans Evil?
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Regular readers may have noticed that in my “Featured Links” section there are several links for payday loan companies.
Since my site doesn’t really rank for that phrase I’m not sure why, but I get quite a few companies wanting to purchase links for payday loans on this site.
One notable offer came in a few days ago. What made it interesting was that the person who wanted me to write a review of their site or service began their proposal assuming that I would be against payday loans and they felt that they needed to defend their business.
I consider myself a business person and someone who believes in personal responsibility so I feel that I could at least offer a balanced viewpoint on payday loans. I thought it would be fun to explore some of the issues around these loans in a blog post and see what others had to say.
The Payday Loan Bonanza
In my niche site days, I made quite a bit of money from the payday loan niche. I can tell you it is BIG business. Since most of it can be automated it is also the perfect candidate for serious money online. The foot traffic size of market limitations for the insta-cash store on the street corner disappear in cyberspace.
On my niche site, a payday loan company would pay between $20 and $30 just to have someone fill in a form just to inquire about a payday loan. They didn’t even have to actually apply and I made a big commission…that should give you an indication of the amount of money that these companies are making.
Fact 1: The payday loan business is very lucrative (but very competitive).
Who are the Clients?
When I did my market research for my niche sites, it became clear that payday loans were often used by poor people. Terms involving minorities, working poor and military were commonly targeted.
It was obvious that the clients of payday loan companies are primarily going after one type of people; the financially illiterate. To be able to offer such a lucrative payout to affiliates, the life-time value of a payday loan company has to be high, which means that most of their clients are likely repeat customers.
Fact 2: Payday loans are targeted at financially uneducated people.
Who’s to Blame?
I don’t really believe in innocent victims in situations like this. Since people are free to use or not use these services I can’t really see any reason to say that payday loan or cash advance companies are evil.
That said though, it does take a certain kind of mindset to make money from people by providing a service which is likely to contribute to solve a short term problem, and make them worse off in the long run. You’d only need to take a glance at the diet industry and much of the pharmaceutical industry to see how widespread that particular business strategy is currently used.
Fact 3: It serves the payday loan companies well to keep their clients financially illiterate.
How would I Run a Payday Loan Company?
I may be naive but wouldn’t it make more sense to view a payday loan client as someone who needs long term financial education and products rather than someone that you can make a few easy bucks from while you drive them deeper towards poverty.
By offering financial guidance in saving, budgeting and financial planning these payday loan clients could be converted into clients for personal loans, mortgages and investment accounts. In short educate them up from the desperate range of the financial product line up to the much more lucrative and empowered banking products.
Fact (okay Guess) 4: Payday loan companies could make more money in the long run (and sleep better at night) by moving into the financial education business.
What do You Think?
I’d like to hear you thoughts on these high interest rate loans. Would you allow them to advertise on your site? Ban the business altogether?
Maybe it makes me sound heartless and cold, but I personally have no problem whatsoever with payday loans. I understand that sometimes people are in a tough spot financially ( been there, done that ), but that doesn’t mean they should rely on Payday loan companies to cushion their blow.
Our financial system is set up to reward those who have great credit histories by making money cheap to them. On the flip side, those with rough credit history pay more for money - in the form of interest and fees. Yes, payday loans charge extremely high interest rates and fees - but they are the last resort for people with credit so bad, that they can’t obtain a conventional loan.
Lenders that offer payday loans are taking on a lot of risk - and they deserve high returns for their risk.
My opinion is that the payday loan customers are looking for money now, does not matter the cost. They do not want any education in financial matters, they just need the money now, without thinking about its cost or consequences. I compare this to the tobacco industry…. they are “educating” people now, but only after 50 or more years of “exploit” them and because of the pressure from governments.
Answering your question, I would allow them to advertise in my site. Each of us has the right to find a place where to get money quickly and also the obligation of changing something that we feel or perceive as being wrong. If for them is ok to pay this fee then let them do it.
My only question is, do these companies have to print (in small, fine print at least) what they do and charge? If so, each customer is responsible for understanding what they are getting into.
I doubt number 4 is true. How much do you think your bank makes off of you? Financially educated people don’t make companies money. I’ll bet even my credit card companies are just barely breaking even on me (the charges to the stores probably just barely cover the cash back and loan float). If all the people started paying off their CC every month, I’ll bet offers would dry up really quickly.
That being said, I’m a socialist at heart, and I’d rather see financial literacy taught in schools even if it ends up costing me money. It is financial literacy month after all. The poor getting poorer is not really helping the economy grow. And it certainly results in added expenses for the government (welfare, police, etc).
I wouldn’t let them advertise on my site, because I have heard so many stories about them doing more bad than good for people stuck in a cycle of debt, I think in their purest form, they are handy and useful, but unfortunately, too many people use pay day loans when their next pay day isn’t going to cover the repayment.. and that’s when things get ugly.