Pay Day Loans

The issue of pay day loans has been in the news lately with a recurring theme that suggests that the industry is an exploiter of the less well off.  Typically, pay day loans average approximately $400, with a duration of about two weeks.  The annualized cost of these loans, including fees and interest, has been characterized as approximating 300% or more.

The operative word here is “annualized”.  Annualizing a transaction, that is intended to be short term, can be quite misleading.  For example, daily auto rental rates, which assume short term use, would be outrageous if compared to a longer term transaction, such as a purchase or lease.  You might pay $50 plus for a one day rental, with a small discount for a weekly rate.  That same vehicle might lease for $300-500 per month on a multi-year lease.

Investors might want to consider the motivation behind the criticism of the pay day loan industry, which is currently largely made up of thousands of storefront operators.  The need for pay day loans is not going to go away.  The issue is, who will be the ultimate provider, large players, like the Google backed venture, LendUp, or perhaps a return to loan sharking?

All comments and suggestions are welcome.

Walter Kirchberger, CFA®