Who are the real predators out there?

This subject has been on my mind for a while now, and today I have the time to show you guys a few things about calculating numbers. Because of the "predatory" payday loan movement, we have a mass majority out there who think payday loans are built to prey on the poor. The truth however, is payday loan companies PROFIT off the predatory charges of banks. In this post, id like to show you the TRUE meaning of predatory lending, and how banks generate majority of their revenues.

First - Lets examine the APR formula from a payday lending perspective:

APR = (charge/term) * 365

What this formula does is basically break down the APR component to a daily figure, and then multiply it out to the year long figure for the APR calculation. Please note - this isn't an amortization formula (that's a lot more complicated). By using this example we can calculate a simple example:

Principle: 100
Interest: 20 dollars per hundred
Term: bi weekly

APR = (20/14) * 356 = 521%

We all know these are pretty static numbers inside the industry. I would even venture to say these interest rates are a little high. Majority of your states have regulated payday loan charges to around the realms of 15 dollars per hundred. There's only a handful of states out there that are unregulated and charge 20 dollars per hundred.

Anyways.

Lets take a look at an NSF/overdraft banking scenario. Through my years of working with payday loans and its customers, ive learned that MAJORITY of our customers come to us 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 see if they overdraft 100 dollars from their bank.

Amount Charge Balance
20 0 0
15 35 -50
40 35 -125
30 35 -190
15 35 -240

Totals:
Overdraft Amount: 100
NSF/Overdraft Charges: 140
Balance: -240

This is a REALISTIC example. I used to get customers who would overdraft 5 - 10 times on a single 100 dollar balance. Customers come to payday lenders because they're figuring out that they are actually SAVING money with our loans. What would you rather pay to loan out a hundred dollars? 140 or 20? Its also safe to say that majority of the time, banks get their money bank in LESS than 2 weeks. A lot of banks charge a daily fee if your bank account is in the negative. With all that to think about, lets 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 would look like:

APR = (140/14) * 356 = 3650%

3650%!! And this is leaving out some HEAVY factors (the shorter term, the daily negative balance charges). If we calculate those figures in, we'd be looking at a figure somewhere closer to 10000%. Ladies and gentlemen, it is time to understand that there is absolutely NO DIFFERENCE between the interest we charge, and the "overdraft charge" that banks send out to our customers. At the end of the day, both scenarios are exactly the same: interest on money loaned.

The only difference is the price. 521% APR or 3650% APR? 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 loan at 8% APR to someone who has a credit score in the 400 - 500's and ill show you Santa Claus. It won't happen because its simply not profitable. The reality is banks boast about their 8% APR loan which are made ONLY available the rich (with perfect credit score), while secretly charging the middle to lower class customers more than 2000% on small loans.

The fact is majority of society is in the middle class to lower class income bracket. Banks don't make nearly as much in lending to the rich - APRs are low, because the probability of them paying back the bank is mostly guaranteed. Banks make MAJORITY of their money from 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. If you want to read more about that, my friend Jerry wrote a great article a few weeks back: Why Banks Hate Payday Loans