September 1st, 2005 21:45 EST
I'll Pay Later
Why do they do it? Whether it is payday lending, buy-here-pay-here car dealing, rent-to-own pawning, or predatory mortgage lending, the low-income population yields a source of high income for legal loan sharks. According to the Center for Responsible Lending in Washington D.C., approximately $9.1 billion dollars per year in equity is lost on sub prime mortgage loans. Business owners who make money on the use of money take advantage of a group of people that the traditional lending and banking institutions typically reject.
Nine point one billion is just a small piece of the financial pie. There are no solid figures available on income lost paying for used furniture and appliances by the week, cars that sell for three or four times what they are worth, or the typical 15-percent cut in pay most people who borrow from paycheck to paycheck are taking each time they renew a micro short-term loan. None of the money paid back is applied to principal unless it is paid in full when due.
Numerous warnings about legal loan sharking has not stopped the growth of these money shops across the nation. At last count, approximately 100 of these stores opened on a daily basis in North America and Canada, and they show no signs of let up. The business owners say they are not only providing a much-needed service, but are generating jobs in the communities in which they serve.
Most predatory lenders know and understand that the average person is going to either default on their agreement or get caught in a vicious web that they may never be able to get out of without judicial relief. They are set up to win no matter how badly their customer loses, even if they risk losing a little income themselves along the way. For example: With buy-here-pay-here car dealers, there is no real loss. If the buyer defaults, the dealership has their down payment, the car, and an unpaid collectible invoice for the amount still due once the car sells at auction. They can also refinance the same car to another victim, thereby making more money than they would if the buyer actually finished paying for it. Though the same is the case with any financier who must repossess, the difference is that the interest charged borders on being usurious within legal limits, and the down payment alone is typically what the car is worth before the other 18 payments are made. The cars are usually in such disrepair that if $500 earnest money is given, the dealer has made their money on the car and has the buyer legally bound to pay more.
With rent-to-own centers, the answer is easy. Why sell a property for $500 when you can rent the same piece of property and potentially make $2,500-$3,000 from it before it has to be retired for good? With mortgage lending, stripped equity from a homeowner equals receivables in the portfolio of an unscrupulous lender who gets cash paid in hand at a foreclosure sale, or even a short sale. This is viewed as a financial loss on their books, but if one considers all the money they make on the front end in fees, the back end in interest, and the side at an REO sale, or simply by refinancing the same property to someone else - they really have not lost a dime in real time. Unless the property was a real dog ", the loss is only on paper for tax write-off purposes.
With payday lenders, there can be some actual financial loss for the business, but there are additional issues to consider for people who borrow in this manner, including possible non-sufficient fund (NSF) fees, legal prosecution for writing a bad check, and the door is open to be accused of fraud if the owner is so inclined. It all adds up to bad credit practices for people with minimal resources to draw from in order to recover. Suddenly, the victim is a deadbeat.
The reasons debtors consistently allow themselves to be taken " in this manner are multiple: Lack of food, possible eviction, possible repossession of a vehicle, possible threat of disconnected utilities, and even an unexpected medical bill. In the event that those are the not the reasons for resorting to a payday loan, it still adds up to desperation in a world where legalized theft is not only endorsed; but, if anything goes wrong, the victim is blamed for allowing it to happen.
Two major philosophies that apply to any business: Word of mouth is the best advertising there is, and businesses only survive on repeat business .Contrary to their own advertising, cash hackers hope the "one-time` financial crisis turns into several. They have already done their homework and are counting on regulars for the increase in profits.
According to 486loan.com, Millions of Americans living paycheck to paycheck need payday loans to survive ", the cash advance business is the fastest growing industry today! ", and New payday loan business owners get a safe and secure investment. " These businesses are often marketed to potential franchisees as turnkey, meaning they come with only one need " to hang out a shingle and wait for the money to roll in. Business of this kind are called cash cows ".
The following statistics are from the Payday Loan Industry and represent best estimates of the typical returns possible for one payday advance location:
Monthly Volume for 1 store: 575 Checks
Average Loan: $300
Average Fee %: 15%
Average Fee: $15.00 per $100.00 Advanced
Total Monthly Loan Volume: $146,625.00 ($255 X 575)
Total Monthly Fee Volume: $25,875 ($45 X 575)
(Note: Many operators charge an initial "set-up" fee of $5.00 to $10.00 the first time an applicant receives a payday advance. This could add significant additional profits to the operation.)
Big gains for one equal big losses for those who can least afford it in a financial tug-of-war. It is a money pit the debtor will never dig from under.