Are Companies that Make Payday Loans Bad? (Part 2)

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This is a little deep for a Monday post. After all, it seems like every woman I know is hung-over from their Tony's/Hamilton "Super Bowl" last night. And most (all?) of us have Orlando in our hearts. I'll try to make it up to you with something fun on Friday.

I could write "10 Ways to Save Money on Floss" or I could write something with a little more meat. It seems like everyone wants the fluff nowadays, but I feel like bucking the trend today. To buck the trend even more, I imagine that my audience has no interest in payday loans. We're all smart money-saving, investing, right?

Payday Loans

Yesterday, I noticed a flurry of Google News articles about the new payday loan rules being proposed by the Consumer Financial Protection Bureau (CFPB).

It seems this is a controversy on top of a controversy.

Let me take you a minute and rewind the clock to give you my experience with payday loans. I don't recall ever having heard of them until I started blogging at the age of 30. I was fortunately to not live near areas that happened to have Quick Cash stores and the rare times that I passed them, they didn't catch my eye. I consider myself very fortunate to not have lived in the world where they were relevant.

Nine years ago (almost exactly to the day), I asked the question, "Are Companies that Make Payday Loans Bad?"

I realized that I was losing money lending money on even when I was making loans out to people at 29% interest. The default rates were just too high. I wasn't alone. Even the CEO admitted to losing money in his own personal portfolio. Things are much better now, but back then a light went off...

... The payday loan companies were charging such high rates because that's what they needed to charge to make a profit. If they were making huge amounts of profits another company would come in and undercut them taking a share of the profits for themselves. It's not like there's a barrier to entry.

That's not to say payday loans are a good deal for consumers, but I started to look at them as essentially being a fast-food restaurant that specialized in lard-and-gravy covered, french fries. The companies are just providing an option for people... and people are probably smart to look in the other direction.

I'm a huge fan of Consumer Protection. It's the first link you see under my logo. I'm also a fan of the CFPB in general. I like the idea of them trying to help people out of the "debt trap" of getting caught in loans where it's a fight just to pay off the interest. I believe most other personal finance bloggers are a fan of this as well, because I have yet to come across one that says, "Payday loans are good for consumers." I think I come as close as any by trying to look at it from their point of view.

And Google took the unusual step of eliminating their advertising from its system. They are essentially saying, "These are so bad that we don't want this 'blood money'."

We have one controversy in that payday loan stores exist. What's the other?

There are people who are upset about the CFPB proposing rules to eliminate them. One of the top arguments I've seen comes from Forbes Contributor Tim Worstall who suggests that 10 million Americans want payday loans. I take issue with the word "want" as I'm not sure anyone would say, "I'm so blessed to get this payday loan today, so glad that I don't have money to pay my bills."

Worstall points out that payday loan companies have a lot of expenses. They not only have to deal with the defaults as I did with Prosper, but they have to run the store (with costs of employees, lease, etc.). He points out that Goodwill has to get a 250% APR just to break even in the experiments they conducted.

Nonetheless, we should acknowledge that there's some 10 million Americans who need some kind of assistance at this level. Jeff Jacoby of the Boston Globe writes Payday loans are a poor option. No payday loans would be worse. He makes a good comparison that hearing aids are a pain in the neck, but if you are losing your hearing, they do the job.

So what do we do?

Worstall suggests that technology can help solve the problem. I agree. While charging 29% in Prosper didn't work with the default rates, maybe charging 50% would? Wouldn't a loan at 50% be better than 400%? It's certainly easier to maintain a website marketplace that is available nationwide than some 20,000 physical storefronts. In short, let's build a hearing aid that isn't such a pain in the neck.

Let's encourage real financial literacy in schools. Is this going to eliminate the problem? Of course not. However, it might help some 20-30% of people. If we can take the 10 million number and make it 7 million with better terms, that's much better, right?

Finally, and I'm not sure how to implement this in a productive way, but there could be a public assistance program. I'm hesitant to suggest it, because it sounds like a hand-out that may encourage more people to be put in this position. I'm not suggesting a hand-out, but perhaps something that could help subsidize these loans a little bit, especially if a consumer can somehow show that are less likely to default.

What do you think? Can we build a better mousetrap to help those who are caught in a debt trap? Let me know in the comments below.

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Posted on June 13, 2016.

Cable TV Boxes: The Sneaky Power Hog

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One of the most surprising things I've learned in the past few years is that cable boxes require a ton of electricity. (That statement came out sadder than I intended it to.) I was reminded of this recently by a great story in the LA Times.

The small boxes can use as much as $8 of electricity a month, according to the article... second to only air conditioners. While $8 might not blow you away, it does add up, especially if you a bunch of televisions in your house.

The tragedy of the situation is that it is completely unnecessary. At it's core, a DVR is simply a computer hard drive. The cable box itself is a very simple specialized computer that hasn't caught up with the advances of computers. I switched out my cable box for a computer running Windows Media Center and a CableCARD and haven't looked back. For me the electricity cost is dependent on the computer. Computers have gotten more and more power-friendly as people demand longer battery life.

The article covers that:

"Energy experts say the boxes could be just as efficient as smartphones, laptop computers or other electronic devices that use a fraction of the power thanks to microprocessors and other technology that conserves electricity. Ideally, they say, these boxes could be put into a deep sleep mode when turned off, cutting consumption to a few watts. At that rate, a box could cost less than $1 a month for power, depending on how much it is used."

Imagine taking the appliance that uses the most electricity in many homes and reducing it to 1/8th of its consumption. That would be tremendous, not just for consumer's wallets, but for the carbon footprint.

Alas, it might be years before it happens. My guess is that most people will be using the cloud to record their shows, which is a whole different ball of wax electricity-wise. Why can't we have more efficient cable boxes today?

According to the article, there's no incentive for cable companies. It is a broken system. Consumers have no choice which cable box they get (unless you count the workaround I used, but you have to be a bit of a tech-whiz). I can't start up a company selling or renting efficient Comcast boxes. It's a shame, because it would probably do well once people realize they could save $75 a bucks a year with my product.

The article quotes expert Steve Kelley who brought an analogy that really hit me:

"The nation's shopping malls annually use hundreds of millions of dollars of electricity, he said, but their owners are often indifferent about reducing power consumption because tenants pay the bills. [Kelly said] 'The mall owners often won't consider spending $50,000 on a system that would pay for itself, because they don't share in the savings.'"

The end result is that it is up to the government to create power requirement standards. The article ends on a bit of a depressing note. Energy advocates have gotten the cable industry to agree to voluntarily reduce power consumption by 10% to 45% by 2017, but this is just a small amount of what could be done today. By 2017, we will likely be talking about having laptops with a full 24 hours of battery. Even with improvements in that range, there will be so much more that could be done so easily.

Finally, there's no penalty for non-compliance. So if the cable companies don't do it, you'll probably just hear a vocal minority complain... if you hear it at all.

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Last updated on July 9, 2014.

What Is Social Capital?

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When I was at Prosper's annual conference, there was a lot of buzz around the term "social capital." I thought I was alone in wondering what it was. However, when I caught up with Wealth Boy, I found that he hadn't heard the term used before. I'm going to go out on a limb and hazard a guess that you haven't either.

Wikipedia defines social capital as the "connections within and between social networks" and the value that they have. Social capital sounds to me like a complex way to define reputation. Others may say that reputation is only a part of social capital. After reading that article, I would expand my layman's definition as "reputation amongst people of influence."

My grandfather had a lot of social capital amongst various business owners in his small town. In my world that's becoming less common. It has been replaced with online social capital. For some it's Facebook and MySpace, while others have LinkedIn. Personally, I have looked into the value of an MBA simply because, from the right school, it provides an incredible amount of social capital. Instead, I developed my social capital as a software engineer in Boston. For better or worse, when I moved out to California I decided not to invest heavily in creating that social capital. I focused on creating social capital with many personal finance bloggers and you, my readers - a decision that I have not regretted.

Prosper was liberal with the use "social capital", because it's core to what they are trying to do. They showed a great example of a Prosper group in Hawaii. Hawaii has a state law that places a strict cap on interest from personal loans - around 12%. For this reason, very few lenders would take anything other than perfect credit from a borrower. Yet some borrowers are getting loans with fairly poor credit history. Why? The Prosper Group leader meet with each borrower individually. She's been to their home, possibly shared a lunch or two, and has vetted that this person is responsible. The result is that the group has zero defaults. Lenders and borrowers are very happy with their transaction - which in turn makes Prosper happy.

The Hawaii group is just one version of social capital at Prosper. Netbanker reported on the effect of endorsements from bidders and how these loans perform 35% to 50% better than loans without endorsements from bidders. RateLadder put his social capital to the test. He is pretty prominent in the Prosper community. People realize that he has incentive to pay loans back on time and that give them great confidence in getting a return on their money. When he examined his loan, he realized that his social capital shaved about 2.5% off the average interest rate. These are examples of very real savings.

At least I know what to call the phenomenon of "It's not what you know, it's who you know."

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Last updated on August 1, 2011.

Are Companies that Make Payday Loans Bad?

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There's a lot of negative talk in the personal space about pay day loans. In general this talk is justified as many people get trapped in loans with high interest rates. The rates are so high that sometimes people can only pay the interest on the loans. They can't pay the principle and get themselves out of the loan.

It is with this thought in mind that I thought, "Why not open up a pay day loan company of my own?" Excusing the ethics of such a thing for a second, wouldn't it seem like a fantastic way to get rich quick and easy. There's the rub. It turns out that it's not quite that easy. If it were really easy, there would be tons of entrepreneurs entering the field and undercutting them by a few percentage points to grab all the business for themselves.

Of course that doesn't happen because numerous payday loan companies exist still charging tremendously high rates. I believe they need to charge these rates because a large number of their clients never repay their debt or interest at all. It may sound like conjecture on my part and in some ways it is. However, I've had a little experience lending money on Prosper. From that experience, it is necessary to charge an outstandingly high price to some people with lower grades. I have lost money when I lent money to people of grade D or E at 29%. I can't imagine the rate I'd have to charge to make money on what Prosper deems high risk or no credit borrowers. Well I can, and it's about the rate that payday loans charge.

I can't recommend that people get payday loans. When you compare payday loans, it's too easy to get trapped into a hole you can't dig out of. Still, I think that payday loan companies aren't nearly as predatory as they are made out to be. I think they are just charging what needs to be charged. If people were more responsible they wouldn't need to charge such high rates. It's up to the consumer to educate themselves.

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Last updated on April 25, 2012.

Are we Living Larger or Living Differently? (Part 2)

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I hadn't anticipated yesterday's Are We Living Larger or Living Differently? turning into a two-parter, but there were some interesting comments including:

  • "Question is whether the living larger requires dual income "” or dual income forces the living larger." - MossySF
  • "With dual income families I might offer that a lot of these situations are out of necessity. Even for the ones that don't start out of necessity, the lifestyles choices often cement dual incomes as necessity. It could be argued that dual incomes are needed because we are living bigger." - The Happy Rock

Both of these hit the same point. Is it a question of what came first, the chicken or the egg? I believe that the dual incomes came first. Women had been progressing towards equality throughout the 20th century and with that comes equal career opportunities. I don't think it was a situation where America gave a collective "oh snap! We spent too much money, let's get another income in here." I don't have any data to back this up, just my opinion.

  • "To answer the title of your post exactly, just this morning I heard on NPR that 1 in 5 homes now have 4 bedrooms versus 1 in 6 in 1990. (I could find census data to confirm the 1990 number, but couldn't find the more recent number) So, yeah, it appears we are living larger (at least our homes are)." - KMC

I had dodged the question of larger homes from the original MSN article. KMC called me on it and now that I've thought about it a little more, I've come up with the answer. Homes may be like McDonalds' french fries. They started off at a normal size and price, but eventually big business realized something. If they make it bigger, their costs may go by a little, but their profits would go up more. Does it really cost that much to make each room another couple of feet bigger?

  • "This is actually one the bigger questions with regards to inflation. How do we measure it? Alot of people feel that the CPI is a poor measure of "True" inflation because it measures really just commodity cost. The oft cited example is that we have 100% more channels for cable and we pay 100% more for it, it costs the same because we have 100% more service. It's not clear to me if that's really a true measure. But at the same time is inflation suppose to measure standard of living improvements?" - Ask Dong

I think this could be the point that I had tried to make when I said that we are traveling more. Since it's more affordable to fly we are getting more for our money. Our standard of living might be three times as good, but we are paying twice for it. And finally,

  • "All I can say is thank you productivity - I love my quality of life." - Rate Ladder

I couldn't have said it better myself...

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Posted on May 24, 2007.

Are we Living Larger or Living Differently?

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Free Money Finance wrote a couple of days ago that we appear to be living larger than we were in the 70s. The article focuses an MSN report and data from a survey by Pew Research.

Fact from the article: "At the start of the 1970s, only 31% of households had more than one car, according to the U.S. Census Bureau; more than a quarter had no vehicles at all. By 1995, 60% of households had more than one car and only 8% were carless."
My Explanation: Many households are dual income, which often require two cars for transportation.

Fact from the article: "We ate at home. ...even as food costs have dropped, the portion of our budgets we spend on eating out has grown considerably."
My Explanation: Similar to the above explanation, with both adults working full time, there's less time to cook at home. The solution, out source the job to a restaurant.

Fact from the article: "We vacationed closer to home, too. U.S. airlines weren't deregulated until 1978, and before then flying was a pricey proposition."
My Explanation: There's not really much to explain, flying is cheaper now, so people are able to spend a little more and get far better value. It's also worth noting that in the world of the Internet it's easier to make friends far away and want to visit them. Additionally one can "tour" far away destinations easier online, so we know what we were missing now. I believe that we've decided that we don't want to miss it anymore.

Fact from the article: (Paraphrased) We spend more on entertainment expenses. "TV was free; most people picked up stations with an antenna attached to the roof."
My Explanation: In the 1970's it was possible to watch your favorite sports team on free television. New Englanders have to pay for cable to watch the Red Sox now. If I want to watch them from California, it will cost an addition $160 a year for a special package. In the 1970's that antenna attached to the roof gave pretty good reception. Today, in my apartment where I can't attach antenna's to the roof, I need cable or satellite television to get what people got for free in the 1970's

Fact from the article: 3% of the people surveyed considered an iPod as a necessity.
My Explanation: How many people considered turntables, radios, or 8-track tape players necessities in the 1970s? We aren't given that data, but I'm betting more than 3%.

See living larger and living differently part 2, for more thoughts and conclusions on how we've changed.

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Last updated on August 21, 2008.

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