Monday, January 15, 2007

Patricia J. Cirillo, president of Cypress Research Group, a market and business research firm, is responding to the Dec. 26 editorial “Modern day usury / Cap interest rates on payday loans” in The Sacramento Bee …

The Bee editorial urging Congress to extend a 36 percent interest cap for military members on short-term loans, in particular online payday loans, to all consumers ignores the real economic outcome:

• Limited options in the marketplace for consumers and increased costs.

Deferred deposit transactions - known as cash loans - are just one competitive choice for consumers who need short-term credit. All of these choices have fees.

But deferred deposit, which is regulated by California’s Department of Corporations, is often the least expensive and most convenient option - an option consumers would likely lose if the interest cap were extended.

Is that a desirable outcome?

Not for the hundreds of thousands of Californians who need short-term loans each year. The reality is that if you need an unsecured, short-term no fax payday loan, there are only a few commercial options. You could let a couple of checks bounce, using overdraft protection from your bank.

This would cost, on average, $54, a bit more than the cost of a $300 payday loan. Or, you could elect to be late on some routine bills - credit cards, mortgage, rent or car payments. Each would incur late fees - for example $39 or more for a credit card late fee, plus interest.

And being late could damage your credit.

A 36 percent rate cap, from a business perspective, would make it nearly impossible for companies to offer payday advances in California. Simply put, the costs (labor, worker benefits, rent, facilities, insurance, interest, etc.) of processing an average loan - which takes about 20 minutes - cannot be covered by revenue from the 36 percent annual rate over two weeks on the maximum $300 transaction California law allows.

In fact, this is why Advance America, one of the country’s largest providers, has announced it will not wait until October 2007 to stop offering transactions to military members.

It is easy to question all short-term faxless cash advance fees. But the fact is the costs to provide a $300 loan are the same as the costs for providing a $3,000 loan. And while a 36 percent rate cap would eliminate choice for responsible consumers, the need for these types of loans will not go away.

The winners in this scenario would be those offering unsecured, short-term credit - both within and outside the law - who often already charge more than payday lenders.

And lack of competition does not lead to decreased costs, just the opposite.

This entry was posted on Monday, January 15th, 2007 at 4:36 pm and is filed under California.