Payday Lending: Why Isn’t Everyone Doing It?

Matt Zwolinski at Bleeding Heart
Libertarians raises,
and answers, some interesting questions about those who
feel/fear that payday lending is not a service to people who need
it and want to pay for it, but essentially hyperprofitable
exploitation of them:

If payday lending is so profitable, why isn’t everybody
doing it? This is a good question to ask
yourself anytime you hear a story about some company earning
unusually high profits off the back of a vulnerable population. If
investors could earn a 200% rate of return by investing in new
payday lending operations, why are smart investors wasting
their time and money with anything else? Perhaps there’s
something more to the picture that we’re not seeing?

Payday lending is not that
profitable. Well, we don’t
have to guess. People have studied this. And according
to one
study, the average profit earned by payday lenders was
just 7.63%. By way of comparison, the same study reports that the
average Starbucks franchise earns about 9% profit. So, if that 400%
APR isn’t translating into sky-high profits for payday lenders,
where exactly is it going?

Payday loans are short
term loans. An
Uber ride from downtown San Diego to La Jolla costs about $25. I
think that’s a pretty reasonable price. But suppose I told you
that the rate Uber charges to drive you 12.5 miles in San
Diego would translate into a $6,000 trip from San Diego to
Boston! Outrageous! Exploitative! Except, nobody
uses Uber that way. And almost nobody uses
payday lenders to take out loans that are appropriately
characterized by
an annual percentage rate. Payday
loans are short term loans….

So payday lenders aren’t earning as much as we think. But
they’re also spending a lot more than we think. Payday lenders,
unlike banks, keep long hours. That costs money. They also have a
relatively high store density. That costs money, too. Finally,
think about this. Payday lenders are lending to people who have a
hard time getting credit elsewhere. Why do they have a hard time
getting credit elsewhere? Because they have very bad credit. What
does that mean for payday lenders? It means that sizeable portion
of the loans they extend are going to default.
And that costs money.