Claims of predatory lending practices and high costs of payday installment loans and other short-term loans have urged FSCA or the Financial Service Centers of America to act on the problem. They requested the services of a well-known financial firm, Ernst & Young LLP, to conduct a random survey to analysis the cost of the financial products that provide short term credit for many American consumers today.
With information gathered from 2,687 stores all over the United States, the survey came up overwhelming results. Surprisingly, the data acquired in the survey clearly revealed that payday installment loans and other short-term loans have fair and reasonable costs. The loans are offered with prices affordable for consumers that need instant cash or short-term loans in the case of unexpected financial emergencies.
According to Joseph Coleman, Chairman of FSCA, “Based on the study, it is clear that any attempts to impose artificial rate caps will result in the elimination of a product used responsibly by millions of Americans to address small dollar, short-term credit needs.” The study of the Ernst & Young firm reveals the following facts regarding the use of payday installment loans and other short-term loans:
· The average revenue of lenders of payday installment loans and other short-term loans is $15.26 for every $100 loaned. This is compared to the lenders in store front establishments who have an average cost of $13.89 for every $100 loaned.
· On a pre-tax and pre-interest basis, lenders of payday installment loans and other short-term loans earn an average profit of $1.37 per $100 on the principal loan amount, which in turn represents a modest margin of 9.1%, before taxes. This shows that lenders do not excessively profit or take advantage of the financial woes of their consumers.
· There are no collateral requirements for this type of loan, so lenders face greater risk than lenders who require some form of collateral. According to the report of Ernst & Young, the average bad debt cost is $3.74 per $100 loaned or 26.9% of the total cost.
This study conducted by Ernst & Young is a helpful guide for the proposed legislation pending in Congress. There are proposals in Congress and in various states to reduce the APR from 397% to 36%. If this is enacted into law, such a fee cap will make payday loans unprofitable, lenders will cease to offer this financial product to consumers. This may be helpful to consumers drowning in debt but this is detrimental for those who need instant cash for emergency situations. Until the government offers convenient and easy to obtain financial options compared to payday installment loans and other short-term loans, there is no reason to eliminate the industry.