Secret Network Connects Harvard Money to Payday Loans(bloomberg.com)
bloomberg.com
Secret Network Connects Harvard Money to Payday Loans
http://www.bloomberg.com/news/2014-09-04/secret-network-connects-harvard-money-to-payday-loans.html
55 comments
Credit isn't for everyone! This is why there are ancient provisions in most religions against lending to the poor.
It rarely helps them and often makes their lives much worse. If they need something so desperately (food, shelter, etc), private charity or government assistance seems like a better means of providing it than payday lenders.
It rarely helps them and often makes their lives much worse. If they need something so desperately (food, shelter, etc), private charity or government assistance seems like a better means of providing it than payday lenders.
It would be interesting to know what the small loans are actually being used for. Are they being spent on healthcare bills? Clothes for their children? Or are they being used to pay off another bad debt like a credit card?
Equally interesting is that they tend to pay them back by hitting up their relatives for cash (which would have probably been a better idea in the first place!).
http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-...
http://bucks.blogs.nytimes.com/2013/02/27/why-borrowers-use-...
There are proposals to bring back postal banking, including small loans:
http://www.slate.com/articles/news_and_politics/history/2014...
That's pretty difficult to surmise given you don't know how much of the interest is for profit vs how much covers risk of defaulters. Arbitrarily, of that $700 turned $3900 loan a non-profit might still need to run it $3500 just to cover all the other loans that they receive nothing from.
Isn't this why Pawn Shops exist? In most states, pawn shops can't charge over 4% interest on a loan so the interest doesn't compile nearly as fast as a payday loan place.
The only issue is not having something that gives you enough collateral to get the loan in the first place.
The only issue is not having something that gives you enough collateral to get the loan in the first place.
I really hate to defend payday lenders but payday loans are VERY high risk. Everyone always hears about the poor person who paid $3900 in interest on a $700 loan but no one ever hears about the eight other people who took out $500 loans then never paid them back. I'm not sure a non-profit org would do well in this sector, it's not for the faint of heart.
Instead of this, set up a non-profit payday loan company that offers loans at market rates, but uses the profits from the loans to offer free financial planning and education for its customers.
I believe if you offered market rates on these high risk loans there wouldn't be any profit. The default rate is too high to allow for market rates.
Market rates? You mean the same rate that people with good credit get? I'm guessing there would be no profit in such a situation.
No, by 'market rate' I mean what other payday loan shops are charging in the area.
The real problem isn't the loan itself, even if it seems exploitative: if someone is in a cash crunch, it's perfectly rational to pay something like $20 to get $200 today (that seems to be what places near me advertise, at least as introductory rates) so they can pay their rent and not be evicted. The problem is the cycle they get into where then they're $20 behind for the next one. Then they get another loan and they're $40 behind for the next one, and so on.
So you catch people that are already in the cycle, fix their immediate need (they need $200 to pay their rent), then help them figure out a way to solve the larger problem (have cash on hand in time for next month's rent) and break out of the cycle.
So the 'mission' of the shop would become to put themselves and all other payday loan shops in the area out of business due to a lack of customers.
Of course, this assumes that the root problem is a lack of planning or education about personal finance. Maybe an outsider's perspective would help. Or maybe that's completely the wrong assumptions, I don't know.
The real problem isn't the loan itself, even if it seems exploitative: if someone is in a cash crunch, it's perfectly rational to pay something like $20 to get $200 today (that seems to be what places near me advertise, at least as introductory rates) so they can pay their rent and not be evicted. The problem is the cycle they get into where then they're $20 behind for the next one. Then they get another loan and they're $40 behind for the next one, and so on.
So you catch people that are already in the cycle, fix their immediate need (they need $200 to pay their rent), then help them figure out a way to solve the larger problem (have cash on hand in time for next month's rent) and break out of the cycle.
So the 'mission' of the shop would become to put themselves and all other payday loan shops in the area out of business due to a lack of customers.
Of course, this assumes that the root problem is a lack of planning or education about personal finance. Maybe an outsider's perspective would help. Or maybe that's completely the wrong assumptions, I don't know.
I was thinking this very thing yesterday as I walked down the street past a payday loan shop. I see no reason one couldn't open their own competitor with slightly lower rates and then ratchet down until you're just profitable enough to continue while giving the best deals to the people who need it.
I feel like it's similar to how credit unions do what banks do, but in their customers' interest rather than the owners.
I feel like it's similar to how credit unions do what banks do, but in their customers' interest rather than the owners.
> I see no reason one couldn't open their own competitor with slightly lower rates
You would have a very difficult time attracting customers. Ignoring the fact that much of the payday loan industry is run by organized crime and you would likely end up with a bullet in the back of your head, even if it were totally safe you would get very little advantage from offering a lower interest rate. Studies have shown that people in economic trouble are not capable of making wise choices. It's commonly referred to as 'decision fatigue'.
You would have a very difficult time attracting customers. Ignoring the fact that much of the payday loan industry is run by organized crime and you would likely end up with a bullet in the back of your head, even if it were totally safe you would get very little advantage from offering a lower interest rate. Studies have shown that people in economic trouble are not capable of making wise choices. It's commonly referred to as 'decision fatigue'.
I have no knowledge of who runs the industry, but assuming it's perfectly safe - I'm not looking for an advantage. I'm talking about a social enterprise that disguises itself as a sleazy payday loan place, same kind of branding and everything but with more favourable terms for the customer.
I'm guessing geographical location is the biggest factor in influencing their 'choice' of payday loan shop to use, so it would be a matter of taking advantage of that decision fatigue to help them without them realizing it.
I'm guessing geographical location is the biggest factor in influencing their 'choice' of payday loan shop to use, so it would be a matter of taking advantage of that decision fatigue to help them without them realizing it.
Just because there's a need for something, doesn't mean it should exist.
So your opinion is that people with bad credit who need money should have no way of getting a loan? Why do you think that's better than the current situation?
How many of the people need these loans for food/shelter/health?
I would guess quite a few, if only indirectly.
If you are interested in this topic, you should watch: Last Week Tonight with John Oliver: Predatory Lending (HBO) [1]. I think he does a pretty good job in giving an overview of what predatory lending is. Although, he does not talk about Harvard, MIT, or pension funds, this is all new as far as I know.
[1] https://www.youtube.com/watch?v=PDylgzybWAw
[1] https://www.youtube.com/watch?v=PDylgzybWAw
There's a documentation called "Master of the universe" by Marc Bauder, which really shows the insides of how finance works nowadays. I don't know if it's available in english yet, :/.
Trailer with english subs: https://www.youtube.com/watch?v=OIUPWWwEclc
From IMDB [0]: "A former banker in Germany, who entered the business with the advent of modern computer systems reminisces of his working years in some of the world-leading banking corporations."
[0] http://www.imdb.com/title/tt3129484/
Trailer with english subs: https://www.youtube.com/watch?v=OIUPWWwEclc
From IMDB [0]: "A former banker in Germany, who entered the business with the advent of modern computer systems reminisces of his working years in some of the world-leading banking corporations."
[0] http://www.imdb.com/title/tt3129484/
Even better, check out Last Week Tonight's bit (John Oliver's show on HBO) on payday loan companies [0] - they're utterly appalling.
[0] http://m.youtube.com/watch?v=PDylgzybWAw
Edit: spelling
[0] http://m.youtube.com/watch?v=PDylgzybWAw
Edit: spelling
Personally I think if a university is as rich as Harvard is "investing" (unwillingly/indirectly accoding to the interview) in a payday loan, they might as well just make a Harvard Loan Institution which it lends students loans on a reasonable interest rate. Students CAN also invest in this loaning business and get a fair share. But I am sure IRS, the state and the federal government will jump in and make everything impossible to run.
Should Google really be selling advertising to these sites? Payday loan operations really are the scum at the bottom of the barrel.
Google makes, quite literally, billions of dollars off the bottom of the barrel.
There is a dark iceberg under the consumer Internet. Online pharmacies. Rebill scams. "Government grant" applications. High interest loans. Educational institutions of dubious utility (disclaimer: took one's shilling once, indirectly, and regret it a bit). Spam, scams, and the like, on a massive scale.
There is a UI for AdSense publishers where some Google PM made the decision "If we give them options to tart up their website less, let's tell them how much money it costs."
http://www.seobook.com/how-make-easy-money-google
There is a dark iceberg under the consumer Internet. Online pharmacies. Rebill scams. "Government grant" applications. High interest loans. Educational institutions of dubious utility (disclaimer: took one's shilling once, indirectly, and regret it a bit). Spam, scams, and the like, on a massive scale.
There is a UI for AdSense publishers where some Google PM made the decision "If we give them options to tart up their website less, let's tell them how much money it costs."
http://www.seobook.com/how-make-easy-money-google
At least re: online pharmacy, that's patently false. Coming from someone who currently runs a legitimate online pharmacy, there is a 9-12 month accreditation process (VIPPS) that adwords, etc requires before letting you advertise.
That's presumably because Google doesn't want to be fined another $500 million for having their AdWords sales reps give their pharmacy customers advice on how to avoid Google's pharmacy compliance rules.
http://bits.blogs.nytimes.com/2011/08/24/google-reaches-500-...
http://bits.blogs.nytimes.com/2011/08/24/google-reaches-500-...
That would depend on whether Google is ever actually expected to PAY $500 million and whether they earned more than $500 million by breaking the law to begin with. If they made $501 million off of it, all the government has done is guarantee that is the new standard for business conduct. And usually companies that get hit with $500 million fines get that reduced to $100k or so on appeal.
Sure, after years of essentially no regulation and Google paying a massive fine.
You say that, but the people are taking these loans because they need them and no one else is giving them a better offer.
Exactly this. These are people with poor credit histories at high risk of defaulting and usually a track record of late payments on bills.
No one will touch them without charging exorbitant fees. We either stop it and let people suffer, or we allow it to continue and people at least have some ability to continue living a somewhat decent quality of life and not homeless on the streets.
No one will touch them without charging exorbitant fees. We either stop it and let people suffer, or we allow it to continue and people at least have some ability to continue living a somewhat decent quality of life and not homeless on the streets.
I don't think those are the only two options. Payday loan companies have exorbitant interest rates, in other countries there are different - and less based on graft - ways of dealing with this problem.
For instance in NL we have the 'Gemeentelijke kredietbank' (https://www.degkb.nl/diensten/kredietverlening in dutch), a bank that operates without profit motive for those in situations as you described above.
For instance in NL we have the 'Gemeentelijke kredietbank' (https://www.degkb.nl/diensten/kredietverlening in dutch), a bank that operates without profit motive for those in situations as you described above.
> I don't think those are the only two options.
Another option is that it's made illegal, and there are no good alternatives, so "unofficial" sources for loans are found. These can range from family members to Mafias.
Another option is that it's made illegal, and there are no good alternatives, so "unofficial" sources for loans are found. These can range from family members to Mafias.
Currently the mafia could advertise as being cheaper than Wonga.
Cheaper maybe but their repo men leave a lot to be desired.
It's probably cheaper to get a loan from the Mafia in some ways because they have different ways of recovering money from those who don't pay their debts, and more incentives at their disposition than legal companies do.
I don't think this works in socialist countries. "Pay up or I'll break your legs!" "Okay, you won't get your money, I get my legs fixed for free and I get disability and unemployment."
It is often exactly the same people, just with a different hat and script.
When the economy tanks, the government is one of the very few entities that can still borrow cheaply and in quantity.
Unfortunately many governments are off flogging austerity to the public while underwriting the banks and keeping interest rates near zero. So the banks can't be bothered lending and the lender of last resort becomes the payday loans companies. Meanwhile traditional banking is busy investing in the payday loans rather than directly lending itself as bank loans follow interest rates.
The USA is actually doing comparatively well in all this as it never took the austerity thing to heart as much as the Eurozone, where Germany is currently worrying about a triple-dip.
edit - as far as I can tell, the reason that the interest rates have been kept so low, at least for here in the UK, is because the house price bubble must be defended at all costs.
There is a large portion of the UK economy that will scream blue-murder if they stop getting massive year on year returns on simple ownership of housing and the Bank of England doesn't like pissing them off, which is going to be Mike Carney's job when he finally raises interest rates, shortly before jumping ship as the official scapegoat of the UK house price crash.
Obviously this is a massive guess, but it looks somewhat likely.
Unfortunately many governments are off flogging austerity to the public while underwriting the banks and keeping interest rates near zero. So the banks can't be bothered lending and the lender of last resort becomes the payday loans companies. Meanwhile traditional banking is busy investing in the payday loans rather than directly lending itself as bank loans follow interest rates.
The USA is actually doing comparatively well in all this as it never took the austerity thing to heart as much as the Eurozone, where Germany is currently worrying about a triple-dip.
edit - as far as I can tell, the reason that the interest rates have been kept so low, at least for here in the UK, is because the house price bubble must be defended at all costs.
There is a large portion of the UK economy that will scream blue-murder if they stop getting massive year on year returns on simple ownership of housing and the Bank of England doesn't like pissing them off, which is going to be Mike Carney's job when he finally raises interest rates, shortly before jumping ship as the official scapegoat of the UK house price crash.
Obviously this is a massive guess, but it looks somewhat likely.
Mark Carney is the reason Canada basically bypassed this recession. It was so minor hear it was barely noticed, the biggest impact was the stall in new house construction.
However our banks thrived, they profited by offering loans to major banks down in the US.
House prices are on the up and up. Me and my wife bought just before they tightened up mortgage regulations here, since then house prices in our area have been going up by about 13% per year as banks were no longer issuing mortgages for Toronto house prices ($500k and up) as the down payment required doubled and they increased the threshold on the default insurance (you need about 15% down to get the same rate you used to at 5% down).
However, the banks were being so risk averse in the recession I couldn't even get approved for a $500 credit card. I'm from the UK, so with no credit history I was an untouchable. A couple years earlier my wife with essentially negative income as a student had been handed cards left, right and centre.
However our banks thrived, they profited by offering loans to major banks down in the US.
House prices are on the up and up. Me and my wife bought just before they tightened up mortgage regulations here, since then house prices in our area have been going up by about 13% per year as banks were no longer issuing mortgages for Toronto house prices ($500k and up) as the down payment required doubled and they increased the threshold on the default insurance (you need about 15% down to get the same rate you used to at 5% down).
However, the banks were being so risk averse in the recession I couldn't even get approved for a $500 credit card. I'm from the UK, so with no credit history I was an untouchable. A couple years earlier my wife with essentially negative income as a student had been handed cards left, right and centre.
The problem is finding the balance. They will suffer without the fresh loan, but they'll suffer more if they can't cope with the fresh loan and end up in an even bigger trap with more predatory types after them. And some companies, going by certain leaked memos that have been circulating, are designed to be evil and extract as much as possible without any pretence of trying to help their customers.
Didn't you get the memo? They're allowed to be evil now.
I think this raises the interesting point that investments have become increasingly abstract. Money goes in, returns come out, and that's generally the end of the story.
I certainly can't list all of the companies I have investments in, and I bet most people can't either, other than to say they have a mix of mutual/index funds.
I certainly can't list all of the companies I have investments in, and I bet most people can't either, other than to say they have a mix of mutual/index funds.
I refuse to hold broad funds for this reason. It's much less convenient and potentially a lot costlier (making individual stock trades or at least sticking to smaller sector funds, which generally have higher expense ratios, where I can approve of each holding), but I have my own definition of evil companies and I refuse to hold even 0.0000000000000001% of them.
It is not only less convenient and potentially costlier it also means you carry much higher risks.
I applaud you for your principled stance but you should be aware of all the consequences.
I applaud you for your principled stance but you should be aware of all the consequences.
I'm aware, such a stance is definitely on the very opposite end of the simplicity of a total market fund. Even choosing some sector funds is difficult. REITs for example would seem to be an easy one in my opinion (I see nothing wrong with renting real property for money), but the Vanguard fund VNQ still manages to own at least one company I refuse to own, Corrections Corporation of America, so I won't own that fund.
(Another term for this is "socially responsible investing" and there are indexes, and associated high-fee funds, that claim to seek it. However, I feel this is a very personal issue; I wouldn't use such an index because someone's definition of socially responsible/non-evil may be very different from mine. My opinion is such indexes/funds are just gimmicks with high expense ratios.)
And even if such an approach will most likely lead to lower returns (for example, due to higher fees in paying commissions, though that can be reduced or eliminated by smartly taking advantage of brokerage promos), I'm fine with that. I'll take my $1.00 earned from what I consider to be ethical means vs. $10.00 earned from what I consider to be unethical means.
(Another term for this is "socially responsible investing" and there are indexes, and associated high-fee funds, that claim to seek it. However, I feel this is a very personal issue; I wouldn't use such an index because someone's definition of socially responsible/non-evil may be very different from mine. My opinion is such indexes/funds are just gimmicks with high expense ratios.)
And even if such an approach will most likely lead to lower returns (for example, due to higher fees in paying commissions, though that can be reduced or eliminated by smartly taking advantage of brokerage promos), I'm fine with that. I'll take my $1.00 earned from what I consider to be ethical means vs. $10.00 earned from what I consider to be unethical means.
>and I refuse to hold even 0.0000000000000001% of them.
You say that, but 0.0000000000000001% of even the world's largest company by market cap (Apple, at 592.44B) would be $0.000000560337
if you ever so much as glance at an ad an evil company runs, then assuming a CPM of $0.01 (two orders of magnitude lower than actual average cost), your single glance is worth $0.00001 or 17 times the value you said you would never hold.
So you'd never hold $0.0000000000000001% of an evil company but you are more than happy to just give them 17 times that value for free by glancing at one of their ads at some point in your life?
You need to lower your purity standards if you don't want to be a hypocrite :)
EDIT: all right, I mixed my metaphor. just think of an evil ad company :)
You say that, but 0.0000000000000001% of even the world's largest company by market cap (Apple, at 592.44B) would be $0.000000560337
if you ever so much as glance at an ad an evil company runs, then assuming a CPM of $0.01 (two orders of magnitude lower than actual average cost), your single glance is worth $0.00001 or 17 times the value you said you would never hold.
So you'd never hold $0.0000000000000001% of an evil company but you are more than happy to just give them 17 times that value for free by glancing at one of their ads at some point in your life?
You need to lower your purity standards if you don't want to be a hypocrite :)
EDIT: all right, I mixed my metaphor. just think of an evil ad company :)
I'm not sure I follow you about giving them 17 times that value. If I think a company is evil, that means I won't be buying their products, so if they're paying for my ad impression, that's good from my point of view because they're just throwing money away without any chance of me buying their product. (Not that the amount of money is meaningful, but still.)
But yeah, the 0.xxx1% percentage was just exaggeration :P
But yeah, the 0.xxx1% percentage was just exaggeration :P
The US has usury laws? I thought those were abandoned decades ago? Serious question... I thought Delaware started by getting rid of them and everyone else followed suit to attract the business of consumer lending companies? What level does interest have to be to qualify as 'usury' now?
Usury is defined by individual state law. Some states have no usury laws, but many do. There are loopholes in alot of them as well. Here's a summary of the state laws:
http://www.lendingkarma.com/content/state-usury-laws-legal-i...
http://www.lendingkarma.com/content/state-usury-laws-legal-i...
What an interesting and complex network.
It says some horrible things about me that what I found most interesting was the demeanor of Zeke Faux. I have rarely ever seen someone so visibly uncomfortable in front of the camera. It was kind of amazing.
It says some horrible things about me that what I found most interesting was the demeanor of Zeke Faux. I have rarely ever seen someone so visibly uncomfortable in front of the camera. It was kind of amazing.
Once again, ethics gets run-over by the greed bus. Nothing new to see here folks, carry on...
So what's the solution to this problem? Clearly a lot of (maybe all) of the payday loan-type places are evil -- is there a way to service these customers without being evil? Would a not-for-profit (or perhaps even a not-for-an-exorbitant-profit) payday loan organization be possible? Or would the typical nasty collections process, the thousands of dollars of interest on a $500 loan still be required, even if the people at the top weren't becoming millionaires?
I guess what I'm asking is, in the story, we see someone paying something like $3900 on a $700 loan, made by one of these evil companies. What would their total bill be if the loan was made by a non-profit organization? Would it be more like $1000, or still closer to $3900?