Exploiting the Working Poor: a Very Profitable Business

In the Cincinnati Enquirer today:

"COLUMBUS - More than 300,000 Ohioans are trapped in a cycle of debt to payday lenders and are paying more than $318 million in payday loan fees each year, said a report released Wednesday.

The average Ohioan who uses payday lending takes out 7.4 two-week loans each year, beyond the five that researchers consider the trigger to becoming trapped in debt, according to the report from the Ohio Coalition for Responsible Lending. Studies have shown the average payday borrower uses more than one company annually, making the average number of loans likely higher.

The Ohio Financial Services Association, which represents payday lenders, contested the report's data because it estimated Ohio lending using information from four publicly traded payday companies and statistics from other states.

'People use this product because they have a short-term need,' said Darryl Dever, a spokesman."

I went to the PayDay website to learn more about their business practices. If an individual borrows $100, he or she must pay the principle and additional charge of $18.92 within 14 days. If the person cannot pay until 21 days later that amount increases to $27.93. The article reported that the average borrower takes out over 7 loans a year. If each loan is about $100, the borrower would be responsible for $132 in interest payments. That's if they are able to pay it back in 14 days! After that magic day, the charges to the borrower go up. Even with the risk of defaults on repayments, it appears this is a rather lucrative business for PayDay. Who says you can't make money off the working poor? I wonder if PayDay will lower their repayment rates given the Fed lower the discount rate a half a point? I really doubt it.