Hot on the heels of John's op-ed on credit cards fees (and the retailers who want price controls on them) comes a piece by investor (and podcaster) Ryan Krueger on the campaign against payday loans. Some activists want payday loans banned, or at least more tightly regulated, because they point out it's poor working people who are paying all those high fees. Yet it's exactly their uncertain financial situation which keeps them out of the market for other financial tools like credit cards. Clearly what they need is greater access to financial services, not less. So how exactly does banning the practice of one of the few money management tools they have make things better? Krueger also points out some of the misleading math being tossed around by the anti-loan crowd:
The most damaging claim, and consequently the most believed and quoted (as above), is that payday lenders charge an annual percentage yield (APY) of 390 percent. I have yet to read about the simple truth on the other side of that math. There is typically a $15 fee on a $100 loan to be paid back within two weeks. The APY's calculation, however, assumes it is not paid back over any two weeks, until an annual (26 two-week periods multiplied by $15 per period equals $390) percentage rate soars to 390 percent. Using that same math would reveal an average bank's Non-Sufficient Funds charge has an annual percentage rate (APR) of more than 700 percent, and the average credit-card late fee's APR is more than 850 percent.
What's not quite as outrageous is the quiet fact payday customers can and will pay their loans back, which makes this APR calculation completely meaningless. But don't take my word for it, and you can even ignore the facts. Instead, just try to pay 390 percent and see what happens. Most payday lenders won't allow it -- or anything even close.
It's a little disconcerting to realize that the most meaningless of numbers are often the ones most frequently cited. Hmmm - meaningless numbers cited most forcefully in a public policy debate; where have I seen this before?