A Valuable Service to the Stupid.

You still have the freedom to do things that are stupid in America. Unfortunately, many people are exercising that freedom with abandon.

– Christopher Cruise, trainer of mortgage brokers and loan officers.

I was talking to a friend yesterday who had to do some research into one of his company's clients. The client provides high-interest loans to people with poor credit.

No, we're not talking the subprime mortgages connected to the recent wave of home foreclosures throughout the country. These are smaller loans, $200 to $2,000, offered for shorter terms.

He was shocked, he said, when he saw the interest rates the loan company charged its customers. What do you suppose the typical APR (annual percentage rate) was on the company's loans?

When he asked higher ups at his company why they were even doing business with such an enterprise, he was told, in something like  brochure-speak, "They provide a valuable service to poor people who can't get conventional loans."

And then they rape them.

The average APR on the loan company's outstanding loans, my friend said, was 99 percent.

Hard to believe this didn't come from a goon with a baseball bat on the back seat of his El Dorado. I looked for a similar loan online and had no trouble finding this.

The cost of your loan is based on the size of the loan you are approved for. It ranges from $1.00 per day per $100 borrowed (365% APR) for small, short-term loans down to $0.25 per day per $100 borrowed (91% APR) for larger, longer-term loans for customers with successful payment histories or higher credit scores. While these rates are lower than the rates charged by many other short term lenders, they are higher than some other forms of credit, so we encourage you to pay off your loan as quickly as possible.

Nice that they provide a little credit counseling.

They also give an example of a $1,000 loan repaid in 20 semi-monthly payments of $96.39. That's an APR of 177.4 percent, but it sounds a lot worse than it is, because the total repayment is only $1,927.80 — less than double what was borrowed.

I should call my buddy and tell him his client isn't so bad after all.

Comments

[Smartie]

Wow. I'm surprised that's even legal. Aren't there any usury laws?

[charlieq]

Well, of course it's legal! Why would you ask a question like that?

The whole area is complex, but lenders are able to get around usury laws in several ways — state regulations vary widely and small loan companies, check cashers and pawn brokers aren't governed by the same rules as credit card companies, banks, national banks and mortgage lenders.

Before the loan sharking industry was "reformed" in the late 1990's, interest rates of as high as 700 to 2000 APR were reported.

Minnesota, btw, was a leader in reforming loan sharking back in 1939, as explained in this article
http://links.jstor.org/sici?sici=0023-9186(195424)19%3A1%3C29%3AARSLLS%3E2.0.CO%3B2-D
by J.A.A. Burnquist, a former Minnesota governor who presided over the Commission of Public Safety that cracked down on dissent during WWI.
http://greatdivide.typepad.com/across_the_great_divide/2006/05/subversives.html