Jun 4, 2015
By Phin Upham
John Oliver recently did a bit about payday loans, which the show implied was a predatory scheme. It’s unsurprising that LA Weekly ran a similar story about payday loans. The short-term loans are painted as unethical, with obscene amounts of interest. Yet there is surging demand for this industry. Are payday loans evil? Is anything so cut and dry?
The Scary Stuff About Payday Loans
If we’re going to discuss payday loans with any level of seriousness, we need to move past the outrageous talking points. It’s true that some payday loans carry interest rates that can be in the 1000% range, however that’s annualized percentage. The loans themselves are meant to be short term, so ideally the 1000% interest rate the media enjoys as a talking point would never apply because the loan would never default.
These loans are voluntary too, and they serve both parties.
What makes payday loans “bad” is what happens when people default. It’s important to understand that usury is not a “bad” word or concept. Usury certainly wasn’t viewed as evil when the federal government created the Federal Housing Administration, which was designed to loan money and stimulate home ownership in the lower income brackets of society. Payday loans represent a $6 billion industry with demand that can surge across state lines in an effort to get around laws against the practice.
Lenders can act in an unethical fashion. That has never been in dispute, but the loans themselves are incapable of carrying a distinction as “good” or “evil.” Payday loans have benefitted low income households all across America.
About the Author: Phin Upham is an investor at a family office/ hedgefund, where he focuses on special situation illiquid investing. Before this position, Phin Upham was working at Morgan Stanley in the Media and Telecom group. You may contact Phin on his Phin Upham website or Twitter page.