Sunday, August 12, 2007

Of Real Estate and Payday Loans

Today I would like to follow up on two stories I wrote recently.

The first, is a story I wrote last week, titled How Much is Your House Worth? The article discusses a website called Zillow, which I just discovered last week but that apparently has been around for a while. The site purports to provide free estimates of real-estate values, however one of the things that I was concerned about was the accuracy of the data on the site. Well, it turns out that the Wall Street Journal went and took a sample of data from Zillow and tested it against some real world sales. The verdict? In most cases Zillow is pretty darn accurate, however there is the occasional spectacular flame-out. It's an interesting article and worth a quick read.

The second story on which I want to follow-up is one that I wrote last month titled A Payday Loan Dilemma. The company that originally contacted me and asked to advertise on my blog contacted me again last week. This time they actually left a comment in response to my original article. Here is the full text of the comment:

"It is true that cash advances and payday loans are high risk loans – for both the borrower and the lender. However, sometimes, these types of payday loans are unavoidable. Some people are unable to set up there [Sic] own emergency fund, and while responsible and making decent money, find themselves in a real bind from time to time. If these types of loans are understood and used for their intended purpose, they can be helpful and can give a person a “shot in the arm” financially to help keep up. Of course there are risks involved, which is why any borrower should always read through the site and loan agreement before taking the loan. Always ask questions. Additionally, if they do get the loan, it is best to pay it off in full or in as few payments as possible because of the interest rates."

As I mentioned in my original post, I agree that Payday loan companies do fill some sort of necessary economic niche, but 968% per year? Come on! I am sure that they could make do with a modest interest rate in the low 200s. I don't expect capitalists to be altruists. A company is in business to make money and does not really need to justify the price it is charging for its services, so long as it is facing real competition and its customers are willing to pay the price. However, I dislike companies that try to dress up their own economic interest in the guise of a public service. I also dislike companies that pretend to tell consumers to not buy their goods and services. Those always remind me of the tobacco industry. Seriously, if you don't want people to buy your product... don't sell it. Don't like this solution? I didn't think so.

Specifically, while the comment above suggests that users of payday loans should use them for their "intended purpose" and pay them off as quickly as possible. However, the company in question, like all others in this industry, profits when people do not take this sort of advice. So why the pretense?


Angie Hartford said...

I think it's pretty nervy of the payday loan folks to put said comment on your web. You could've deleted it, but I think you show a lot of integrity by leaving it and writing about it. Kudos!

Eric said...

So their argument is that because you are a greater risk, they charge more to cover their risk. That doesn't fly. If you give someone 1,000 at 80% apr for 4 years, you've made your money back in 14 months, but you're going to continue to charge money until you've made over $3,000 on top of the $1000. If that were the case, you could simply charge an 80% apr until the $1000 was covered, then reduce the fee to 12-15% (still as reasonable as a credit card) until the term has been completed.

plonkee said...

Its like the whole 'drink responsibly' on ads for alcohol. I know they don't want me to, they want me to get drunk and spend more money on their booze.

Shadox said...

plokee - drink responsibly is right. AND CBS cares. That was a U.S. only reference, Englishmen may not get it. ;-)

Angie - to be fair, they asked me whether I would be ok if they left the comment, and I said it would be fine. I am all for an open discussion, I simply don't want their ads.

Eric - I do want to say that business and morality are two different things from my perspective. If their customers are willing to pay the price, the price is fair, by definition. As long as their customers truly understand what they are getting into (and I am not confident many of those customers have that understanding).