Banks and Credit Unions Force Consumers to Use Payday Loan Products!
The debate so-called “consumer advocates” [not really advocates at all; more anti-business and anti-capitalism] and payday loan advocates get into is stupid! Particularly since these anti-free market folks are peering into our financial products industry from the sidelines.
Do YOU really think banks and credit unions give a crap about their sub-prime customers? Do YOU comprehend that the majority of bank and credit union profits are generated by NSF and other mickey mouse fees they pile on consumers? Do you know who REALLY FUNDS anti-small dollar loan alternative loan products in an effort to eliminate their competition? Do you know that Google funded a payday loan company and then SLAMMED the door to payday loan product advertising on Google? The same Google whose mantra is, “Do No Wrong!”
Other than Professor Lisa Servon, who had the juevos to actually work behind the counter of a RiteCheck in the South Bronx and a payday loan lender in Oakland, California [The Unbanking of America: How the New Class Survives], these people have no clue about the financial needs and measured choices our payday loan, installment loan, and car title loan borrower must make every day.
The misunderstanding about our loan fees is a result of the lack of knowledge about WHY payday loan borrowers CHOOSE our payday loan, car title loan and installment loan products to solve daily financial challenges. Our alternative loan products exist simply because of bank and credit union non-sufficient funds [NSF] Fees.
Nobody “gets” the “business of lending money to the masses” with more thought and empathy than those of us who are on the firing lines, talking and counseling our customers every hour, every day!
Want to see the numbers?
Lets examine the APR formula from a payday lending perspective:
APR = (charge/term) * 365
This APR formula breaks down the APR component to a daily figure and then multiplies that calculation to the annual percentage rate [APR]. This isn’t an amortization formula. That is for our installment loan products.
Interest: $20 dollars per hundred
Term: bi weekly
APR = (20/14) * 356 = 521%
We all know these are relatively static numbers in our industry. The majority of states have regulated payday loan fees to approximately $15 per $100 loaned to consumers. Of course, there are exceptions; Texas is but one example.
Let’s examine a typical NSF/overdraft bank/credit union scenario.
After my 20+ years working with payday loan customers, I’ve learned that the MAJORITY of our customers seek a payday loan product in order to avoid overdraft charges. Because overdraft charges tend to be charged on a per transaction basis, here is an example of what a typical customer would experience when they overdraft $100 dollars from their bank.
Check Amount Bank/Credit Union NSF Charge Balance
$20 $35 -$55
$40 $35 -$130
$30 $35 -$195
$10 $35 -$240
Overdraft Amount: $100
Bank/Credit Union NSF/Overdraft Charges: $140
This is a REAL example. We make payday loans, installment loans and car title loans for customers who overdraft 5 – 10 times on a single $100 balance. Customers come to payday lenders because they easily determine that they are actually SAVING money by employing our alternative loan products to solve their financial challenges.
Put yourself in our borrower’s shoes.
How much would you prefer to pay in fees to borrow $100.00? $140 from your bank? Or $15 to $25 [depends on your state] from us; your friendly small dollar loan provider who is available 6 days per week at a minimum and has store hours enabling you to get off work and visit our store at a time that is convenient for YOU, the borrower.
Banks and credit unions get their money back in LESS than 2 weeks. After all, the borrower’s bank is at “the front of the line” to the borrower’s checking account. The bank takes their money FIRST! Zero risk!! A lot of banks charge a daily fee if your bank account is in the negative. With all that to think about, let’s be CONSERVATIVE and say the bank gets their money back on the next paycheck. And lets forget about that daily negative balance charge.
Here is what the APR formula for a bank “NSF loan”would look like:
Bank/Credit Union APR = (140/14) * 356 = 3650%
3650%!! Are you kidding me?
And, this ignores additional HEAVY financial factors – the shorter term, the daily negative balance charges… If we calculate those figures into the bank’s APR, we’d be looking at a 10,000% APR!
Ladies and gentlemen, regulators and politicians, it’s time to understand that there is absolutely NO DIFFERENCE between the interest we charge and the “overdraft charge” that banks pocket EXCEPT FOR THE FACT THAT PAYDAY LOAN PRODUCTS ARE CHEAPER AND SMARTER for the CONSUMER! At the end of the day, both scenarios are exactly the same: interest on money loaned.
The only difference is the price: 521% APR for a payday loan versus 3650% APR for the bank.
Don’t believe my numbers because you think I’m biased? “Overdraft fees have reached their highest level since 2009, which was at the end of the Great Recession. Consumers paid $34.3 billion in overdraft fees during 2017 compared to $33.3 billion in 2016, The New York Post reported.Mar 29, 2018.”
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Banks boast that their interest rates are around 8% APR, but do our customers have access to them? Show me a bank that will hand out a $300 loan at 8% APR to someone who has a credit score in the 400 – 500’s and I’ll place you on the lap of Santa Claus. It won’t happen because it’s simply not profitable for banks. The reality is that banks boast about their 8% APR loan which are made ONLY available to the rich (with perfect credit scores), while secretly charging the middle to lower class customers more than 2000% on small loans.
The fact is, the majority of society is in the middle class to lower class income bracket today. They need 3 “gig jobs” to live with a roommate, deal with their student debt, make their car lease and EAT. Banks don’t make nearly as much by lending to the rich; APRs are too low and the probability of them paying back the bank is nearly guaranteed.
Banks make the MAJORITY of their money on NSF/Overdraft charges. In a society which lives mostly from paycheck to paycheck it is almost a sure thing that everyone will overdraft their bank accounts once or twice a year at minimum. But that is a whole other subject.
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In essence, a CAB/CSO or Credit Services Organization is defined by the Texas Credit Services Organization Act (Section 393 of the Texas Finance Code) as an entity or person that provides one of the following services:
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* Providing advice or assistance to a consumer regarding the previous two services.
How does the CAB/CSO Credit Services Organization work with consumer loans?
The CAB/CSO Credit Services Organization operates as a broker, The Texas Credit Services Organization Act (CSOA) allows the lender to register as a CAB/CSO and act as a loan broker. Thus, the CAB/CSO can make loans via "3rd Party Lenders" that are UNREGISTERED and UNLICENSED. The CAB/CSO Credit Services Organization acts as a broker for the consumer in need of funds by issuing a "letter-of-credit" on behalf of the consumer to a "3rd Party Lender." This 3rd Party Lender funds the "loan" brokered by the CSO.
How does the Texas CSO Credit Services Organization collect its 3 fees:
A referral fee for referring the consumer to the lender that actually funds the "loan." This is not stipulated by any law but is currently $20 to $30 per $100.
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Jer and the Team at Trihouse Consulting have taught thousands of entrepreneurs the correct way to identify, evaluate, negotiate, perform due diligence on, finance, turn-around and operate payday loan, car title loan, and installment loan businesses; the business of making money by lending money. Some people think we’re nuts for doing this, but the truth is that we’re far from crazy. DOING & Teaching opens doors for us that pales in comparison to any other channel.