Lazy Man and Money

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 Prosper.com 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.

Pay Off Your Mortgage From Your Roth IRA?

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Last week I wrote about the hidden emergency fund in your Roth IRA. In case you didn’t read that article, a huge takeaway was that you can take out contributions (not earnings) out of your Roth IRA penalty-free at any age.

In writing that article, I thought about how much accessible money I might have in my Roth IRA. I’ve been maxing it out for about 15-20 years. That’s a big chunk of change. Without adding it up, I’d estimate it is around $50,000 (some years the maximum contribution was $2000). What if I took all that money out to pay off my mortgage?

Personally, I’d never such a thing and here’s why. The math of the average returns in the stock market (7-8%) is more valuable to me than saving 3.5%, especially when the interest on that is tax-deductible. I’ll go with the math every time and twice on Sunday.

However, there are others who aren’t as focused on the math. Some people, such as those who follow finance “guru” Dave Ramsey hate debt and try to eliminate it as soon as possible. A mortgage is debt. I consider it good debt, but some of these people are against all debt. I understand their thinking, being free of debt can be huge psychologically. It can eliminate stress and that’s a good thing.

This left me wondering, has anyone ever considered making this move? On some level, it makes sense to eliminate your mortgage for peace of mind. You won’t need as big a retirement if you’ve eliminated your biggest expense, right? While all this is true, I’ll still go with the numbers and take the 7-8% compounding over many years vs. the 3.5% (minus the tax deduction) compounding over the same time.

I have to think someone has said, “I’m done with debt. I’m going to raid my Roth IRA and get this debt out of my life.” If you are that person, I’d love to talk to you. I think it’s an interesting option for debt-haters and I’ve seen it discussed.

On the other hand, what about the reverse situation? What if you had home equity and did a cash-out refinance or home equity line of credit (HELOC) for the sole purpose of investing the money to earn a higher percentage. As an entrepreneur, I have access to solo 401Ks and SEP-IRAs, but I often don’t max them out. Why? Because I need the cash to live on. Also, it can be tough to max them out because these types of accounts have higher limits.

Getting money out of your home to invest sounds risky, but it truly is the opposite of pulling money out of your investment to pay off your house, right? So maybe it isn’t so crazy?

What do you think? Let me know in the comments.

Rent-A-Center’s Crazy Commercial Promoting Fiscally Responsibility Fails

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I was watching television the other day and this commercial from Rent-a-Center caught my attention. Go watch the commercial, I’ll wait. Back? Good.

The commercial didn’t catch my attention because the guy wants to buy a 60″ television and his wife is questioning it (I swear). It caught the attention because Rent-A-Center is suggesting that it is a good alternative for those with too many credit card bills that they can’t pay off. How nice of Rent-a-Center to promote fiscal responsibility, right? Well maybe not.

Rent-A-Center’s alternative is to rent you the television at $30 a week. Quick math in my head (more than 50 weeks * $30) shows that it would cost more than $1500 a year. And you can buy this LG 60-Inch Plasma at Amazon for $999 including free shipping. In just 34 weeks, or less than 8 months, you would have owned the TV and been free of any payments.

Rent-A-Center does have a rent-to-own policy. At least the payments won’t continue forever. If you watch the commercial again there’s some very small text at the bottom of the screen explaining the terms. It says that you’ll own the television after 104 weeks for a total costs of $3,118.96. It also says that the MSRP of the television is $1429.

So you can avoiding putting more debt on the credit card by buying a $999 television for more than $3000. How does that compare to credit cards? I found this excellent credit card calculator from Ready For Zero. I put in $1000 in and it showed that at an average interest rate of 15%, you’d pay it off in 8 years and 9 months, paying a total of $717 in interest. Better to pay $717 in interest on a credit card than $2100 at Rent-A-Center, right?

I’ve always known that Rent-A-Center is a ripoff, but I had no idea the magnitude of the rip-off. It is sickening that they’d try to trick consumers to avoid credit card debt for an even worse one. Once I started to realize how bad Rent-A-Center’s rates were I started to find more articles writing about regulation about their business practices.

Consumer Reports also notes that a high interest credit card is much better than Rent-A-Center. They have much better advice, “Avoid rent-to-own, even if it means postponing purchases until you can better afford them.”

Also keep in mind that despite what the guy in the video says you don’t “really need” a 60″ flat screen TV, especially if you have credit card bills that you can’t pay off. I showed the commercial to my wife and she said, “That commercial is wrong on so many levels.” I couldn’t agree more.

Nobody Wants a Million Dollars Reviewed

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Last week when I reviewed Four Hour Work Week by Tim Ferriss Reviewed, I mentioned that I hate books. I really do, but today I’m going to contradict myself. Almost a year ago, Dan Holt sent me his book Nobody Wants a Million Dollars and asked me to review it. It got lost in the shuffle, but this past weekend I had a chance to bring it up.

One of the biggest advantages of this book is that it’s only 133 pages… and large type font. Despite being a slow reader, I could have probably finished it in an hour and a half if I wasn’t watching the Bruins’ game. With it being so short, Mr. Holt has to get to his point and move on… my attention span thanks him for that.

As for the contents of the book, I found myself agreeing with about 60% of the book’s advice. The other 40%, are things that I wouldn’t necessarily say is bad advice, but maybe not targeted at my philosophy of personal finance. All that said, I could see it as a gift to a student graduating college – it’s a good starter on personal finance. If you go that route (and you might not be able to since I see you can’t buy it on Amazon at the time of this writing), please direct them to this post. I have alternative viewpoints on 20% of the book. Here are some examples:

  • Nobody Wants a Million Dollars – This is, of course, the title of the book. The idea behind this is tha if everyone really wanted a million dollars, they could do it by living extremely frugally and working 16 hour days. It’s not that no one wants a million dollars, it’s just that people have different priorities. Anyone who reads this website knows I surely do. Holt agrees with this. However, the idea that No Wants a Million Dollars in the context of working all the time seems like an overly exaggerated premise to start with.
  • Needs vs. Wants – Holt disagrees with the idea of “paying yourself first” when it comes to saving. He believes in covering the basic needs (shelter, food, clothing, etc.) first (Not to be confused with a mansion, great steaks, and fine suits). I think that’s an assumption in “paying yourself first.” If we have to tell people to do the things that keep them alive, I think our society has failed. With that assumption in place, “paying yourself first” in the context of saving for the future makes great sense.
  • Spending – Dan Holt seems to rely very highly on budgets. He checks his purchases to see if they are in the budget. That works for him. I “try to budget in my head” (as he puts it), but I succeed. He always sticks to his pre-determined buying plan when going into a store – even giving himself a speech to reaffirm that if necessary. I allow for the flexibility of picking up useful non-perishable items when they are on sale.
  • The $21,000 Savings on a Car with a No Debt Plan – One of my biggest issues with the book was the comparison of a “Debt Plan” and “No Debt Plan.”
    • Debt Plan – The plan of living with debt is someone putting $5,000 down to buy a new (2007 at the time) $35,000 car at a 7.25% interest rate… thus paying $40,855 after 5 years (I’ve reduced the math details for brevity).
    • No Debt Plan – The plan of avoiding debt is someone buying a used car for $5,000. That opens one up to use the payments they would have made on the new car to save money. After three years of saving, the person can buy the same 2007 car for $20,000 (and still have $4,300 left over).

    The problem that I have with this is that the person with the No Debt Plan isn’t getting an equivalent product. That person is getting two previously used cars instead of the new car that he/she set out for. It turns out that most of the $21,000 in savings from the No Debt Plan, comes from buying a product that deprecates extremely fast after that depreciation. It should be called the Buy Depreciate Assets After They Depreciate Plan. It’s one that could be used not only for cars, but also for technology products (as long as you don’t like new technology features).

In the end the biggest problem I have about this book is that it assumes the reader has a lack of self-discipline. Dan Holt admits to having problems with credit and getting in debt in the past and I think that’s where his view comes from. He advocates using cash as a means of self-control (you can’t spend what you don’t have). When it comes to paying off your credit card each month he wishes you “Good luck” and further says, “you may be lucky enough to pay it off every month, but is it worth the risk?” Paying off your credit card balance each month has nothing to do with luck, it has to do with being disciplined in your spending. And yes the rewards of using my grandfathered 5% cash back card on groceries, gas and drugstores is worth it. It doesn’t hurt that I get another 3% back on office supply, home improvement, and restaurants with another card. These rewards add up to hundreds (maybe even more than a thousand) a year for me.

As long as you can control the opportunity, I think it’s worth trying to maximize everything you can to get ahead. I would include stacking up rewards.

“Debt Crisis in America” & JCR Advertising are Evil

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I don’t know if you’ve seen the Debt Crisis in America commercials on television or not, but when I saw them, I thought, “This is a whole new level of scummy advertising.” If you haven’t seen them, you can watch two of them here. I can’t decide which one is more scummy. Here are some tactics that I notice right off in these commercials:

  • Imagery of Washington D.C. landmarks including The White House – This gives an aura that this commercial is endorsed by the government when it is not. It’s hard not to see how one could get confused by this.
  • Scrolling News Ticker – This makes it look like a news channel like CNN, CNBC, or Bloomberg. News stations like that are generally considered reputable and typically follow the journalistic principles when reporting information.
  • Special Announcement! – How is that to get your attention?!?! What’s special about this announcement? There is no information in this “announcement” that I don’t see 5 to 10 times a day.
  • Speedy facts and figures – It’s
  • Credit Card and Debt Help Line = 1-800-000-0000 – Ever try dialing that number? Well I’ll get to this later on.
  • Transferring the “News” Coverage to Someone Else – Moving the coverage to another person in the way they do is very much like how the news transfers to a different reporter on the scene.
  • Call to Action – The commercial ends with a strong message that the solution is to call the number below – which seems reputable for all the reasons above.

You want to know the scummiest part of all this? The actress/fake newsperson asking you to make that call has no connection to the service they are offering. That’s because this commercial isn’t even designed for one specific company. It is made to be re-branded for any and every debt settlement company in the country, whether they are reputable or not. That’s why there is that aforementioned 1-800-000-0000 number. Just check out their sales pitch:

  • Higher percentage of converted calls to Leads
  • Higher percentage of qualified callers
  • Lower cost per in bound unique lead
  • Instant inbound Activity for your sales staff
  • Trackable phone number provided & routed to your location
  • Inbound call analysis completed & e-mailed to you daily
  • Score calls and evaluate sales staff

It’s pretty clear where their interests lie, isn’t it? If I wanted to buy this commercial and brand it for my company I could. Why should I be worried about these companies just trying to help consumers? Well they aren’t always out to help consumers as you can read on Wikipedia. I don’t really know how to pick a good debt settlement company, but I did find this article which seems like it could have some helpful information. I think the safest way to get out of debt is to go on an extreme savings plan. Cut out or greatly reduce the costs of everything in your life. If you go with that route, I have some tips on how to save money.