by Joe Kirkpatrick
The Obama administration announced this month the formation of a new federal agency to further regulate the pay day lending industry. This comes on top of increasing multi-state regulations that are so strict in some states that these companies have closed all of their stores due to non-profitability. The industry does not need more regulation as they are not the problem.
I wrote my first article about the pay day advance industry over a decade ago, and as far as I know, it still remains the only article to ever be written that did not condemn that type of business. Does that mean I support and approve of it? No. In fact, I don't, but I am a realist, and understand these companies can not function and expand in the rapid manner that they have without consumer demand.
Why is there consumer demand for pawn shops, pay day advance, and rent to own businesses? It is very simple: A large percentage of people cannot manage their money. Many people have a "dog like" mentality when it comes to money management. When a dog sees something across a busy highway it is interested in, it doesn't stop to think "gosh, I might get run over by all these cars passing by if I try to get what I want on the other side of the road." Obviously, humans are considered to have a higher intelligence level than a dog, but when it comes to money management, unfortunately, many are just as dumb as that dog wanting to cross the highway.
I have done pro bono financial counseling for years, and I will never forget a young man who owned a small business seeking my advice. He had an auto repair shop, and was struggling to make weekly payments to various tool truck vendors. Tool truck vendors often offer financing for expensive tools, with a $20 per week payment. This man had twenty five different tools financed with a $20 a week payment! When I tried to explain that totaled $500 a week, he still would say, "But they are only $20 each." He never did understand, and eventually went broke.
Years ago, I took my son to hear Dave Ramsey, the money management expert speak. The two things I remember most about his lecture was that 82% of all adult Americans do not have $1000 in checking, savings, or cash, and a physician who had come to him for counseling who owed over $200,000 in credit card debt that he could not pay. A couple of years ago in New York City, a surgeon, during a surgery, told the assistants he had to take a break for a few minutes. That, in itself, is not uncommon during a lengthy surgery. However, it was later discovered the surgeon had left the hospital and gone to a bank down the block to deposit his pay check to prevent checks he had written from bouncing.
The latest high interest lending industry to emerge is Western Sky Financial. Western Sky's commercials feature a well dressed Native American telling you how "Western Sky is not cheap, but it is cheaper than those pay day advance places." If you live in Tennessee, Western Sky will loan you $5000 for only 116% - yes, that is correct, an annual percentage rate of 116%! A local bank, if you have good credit, will loan you $5000 for 6% to 8%. How does Western Sky charge so much legally? They are owned by the Sioux Indians, and operate on a federally protected Indian reservation which exempts them from many of the federal lending laws.
Perhaps the worst of the worst? Banks. Banks you ask? Banks are those respectable places in the nice buildings all over town. Banks are a very nice place for people in good economic shape with good credit, but for all others, watch out! Why do I rate banks so low? With pawn shops, pay day lending, and Western Sky Financial, they make it clear up front to the consumer they are going to get a financial raping. Banks, on the other hand, hide all their fees and penalties in mounds and pages of fine print. At one time, and I assume it still is, "NSF" (non-sufficient funds) charges were the highest profit vs. cost area of any bank. If you bounce two $20 checks and the bank returned them to the merchant without paying them, they charge you a $30-$35 charge each check. You could have borrowed $200 for two weeks from a pay day lender for $30 - $35. In fact, banks now even charge the merchant who took your check a $3-$5 fee as well.
Now, let's look at the real problem. It isn't the banks, finance companies, rent to own, or payday advance - none would exist but for customers willing to use their services. I haven't really seen the term "addict" applied to money, so maybe I will be first to use the term. Just like a meth addict has to get their fix, many people have to get their money fix. Whether it is a new outfit, new flat screen, or the latest iPhone, Americans are addicted to things they must have. It doesn't matter if you make $20,000 or $200,000 a year, if you spend more than you can afford to pay, rent to own, pay day advance, and Western Sky Financial will be glad to help. If you want help, look for a Dave Ramsey (or one of the other) financial course to be offered through a church or organization in your community.