On Earl Ehrhart

I’ve heard from a lot of people since I put up my morning post and they lead me to believe that not only is there anything inconsistent with both of Rep. Ehrhart’s statements, but that he is right on both counts.

With the pending pay day legislation, there are so many safeguards, etc. to prevent individuals who have a legitimate need for these types of loans from being taken advantage of that we should not have to worry.

Likewise, the fees being imposed under the new legislation are not really the type of interest that would readily be calculable into an APR — doing so would actually be grossly misleading.

So, I apologize for second guessing Rep. Ehrhart.

9 comments

  1. cdubs says:

    Erik, charging a “fee” on payday loans instead of interest is just the industry’s way of getting around conversations about their sky-high APR.

    But talking about the cost of loans in terms of APR is the only fair, apples-to-apples way to compare loan products. Congress passed the Truth in Lending Act in the 1960’s for many good reasons, one of which is that you can calculate interest many ways to confuse people. That’s why everyone must use the same method of calculation.

    Interest is the “rent” paid to borrow money (from Wikipedia) If I charge you $500 to rent an apartment for one week, isn’t that a lot more expensive than charging you $500 to rent an apartment for a month?

    Payday lenders tell their borrowers that the cost is $15 per hundred, and it is only on the paperwork the borrower signs that the true APR is revealed.

    If the borrower asks, they tell him that’s only if you were to borrow the $ for a whole year. This is also what they tell the legislators, that it isn’t fair to “annualize” the interest rate when the loan is for a short period.

    Bottom line: the industry is deathly afraid to talk about the APR because they are afraid of the truth.

    Oh, one more thing. Even bill sponsor Rep. Steve “Thunder” Tumlin has admitted that, under HB 163, the APR on the typical payday loan would be 391 percent.

  2. jsm says:

    I don’t know specifically about pay day lender customers, but I do have some knowledge of ‘typical’ finance company customers, which I assume to be similar. Typical finance company customers don’t care about an APR number, and it wouldn’t affect whether they do business. All they want to know is what the payment is. Their mindset is vastly different from a ‘typical’ legislator or businessman who is looking at an interest rate and how it affects the bottom line.

    To a poor and often uneducated finance company customer the bottom line is whether the bills get paid each week/month and some money is left over for food, gas, and an occasional trip to Blockbuster.

    I think all this wrangling about APR’s and method of disclosure is inconsequential.

  3. cdubs says:

    You’re right that the typical payday customer often doesn’t pay much mind to the APR. But the typical payday customer also has bad credit and is taking out a payday loan because he/she can’t can’t get a loan from a regulated lender. Maybe the “typical” customer would do well to get some free credit counseling and to pay a little more attention to things like APR, rather than to continue to throw money away on high interest payday loans?

  4. Clint Austin says:

    A thought on APR…

    If I earn $15 for loaning $100 for a couple weeks, my APR is going to be 400% according to strict math.

    If I earn $15,000 loaning $100,000 for a year, my APR is going to be 15% according to strict math.

    Which lender do you want to be?

    Moral of the story: APR is not a realistic way to assess earnings on small dollar loans. There is no “economy of scale” for small dollar loans to allow lenders to make a profit at traditional APR levels. It’s the “bulk purchasing” principle applied to lending.

  5. Clint Austin says:

    And another thought: the idea that people only go to payday lenders because “they have bad credit” is flat wrong and a touch elitist.

    Banks and other lenders simply won’t provide the small-dollar loans that many people need. In other words, there is a supply problem as much as a demand problem.

    You and I may not need small dollar loans to get by, but how can we look down our nose at someone who does? Smells a little like elitism to write off all those folks as “bad credit types.”

  6. Nicki says:

    Banks and other lenders simply won’t provide the small-dollar loans that many people need. In other words, there is a supply problem as much as a demand problem.

    Um, yeah they will. They’re called signature loans.

  7. jsm says:

    The issue is not a supply problem. Finance companies operating in Georgia right now will do loans as small as $100, and they specialize in helping people rebuild credit. Many customers of these companies keep perpetual loan accounts with several companies.

    IMO, the issue is financial irresponsibility. Once a person with bad credit and financial difficulty exhausts his resources with finance companies, payday lenders are the only place left to go. They service people who have already defaulted on companies that help ‘bad credit’ customers.

    It’s not government’s place to protect everyone who makes bad decisions.

  8. DougieFresh says:

    jsm,

    Too bad no more than about 10 percent of the voters agree with you. Instead people want no one to ever suffer any of the consequences of their actions.

    When there are no risks in risky or bad behavior, doesn’t that encourage more of it?

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