Reflections

36% Annual Percentage Rate Is Not Enough, Says Check ‘n Go

Posted by on Jun 28, 2010 | 8 Comments

Arizona has followed the lead of some 16 other states in regulating how much pay-day lenders can charge clients. Some pay-day lenders had been charging as much as 460% annual percentage rates, which will come to an end this Thursday in Arizona. The new rate will be limited to only 36%, a rate which has been previously imposed on banks and other lenders. But one company, Ckeck ‘n Go, says it can’t make it with such a miserly interest rate and plans on ceasing operations in the state.

A recent article stated:

Some stores already have shut their doors, and an industry spokesman said more will follow. Payday lenders left in droves from other states that have imposed similar caps.

“What you are going to see is the smaller operators with one, two or three stores will close,” said Lee Miller, a spokesman for Arizona Consumer Financial Services, a trade group that represents payday lenders. “The large companies are looking around and trying to find new products to meet the credit needs of Arizona consumers.”

Miller said that to stay in business, many payday lenders likely will offer auto-title loans, which can generate annual returns of up to 204 percent, according to state law. The Center for Responsible Lending said more than 200 payday stores in Arizona have received auto-title loan licenses in the past two years, as it became more apparent payday licensing would end. Some payday lenders also will continue to offer check-cashing services.

But some large businesses are just throwing in the towel.

Check ‘n Go, licensed under Southwestern & Pacific Specialty Finance Inc. in Cincinnati, stopped offering payday-loan services a month ago in Arizona and began closing 11 of its 34 stores on June 12. The company, which has 102 Arizona employees, plans to close all stores by the end of summer.

I find it hard to believe that any company would be allowed to charge 460% annual percentage rate for any type of loan. This smells of legalized loan sharking.

What do you think?

Comments welcome.

Source – azcentral.com

  • Will

    It is legalized loan sharking. My only concern is that the alternative will be illegal (aka “classic”) loan sharking.

  • Jeff

    The problem is that you are talking about very short term loans. I used to work in a pawn shop, and the rate at the time was 240% per year (20% per month). That was for a 1 month loan.

    3% per month is not enough for a 1 month loan. You loan someone $100 and make $3 on it. By the time your employee(s) look up the value on an item, negotiate the loan amount, complete the paperwork, tag the item, store the item, process the transaction when the customer returns, and retrieve the item from the back of the store, that employee has spent at least 30 minutes on that customer, maybe more.

    If the loan is on a $20 item, it’s even worse – the interest is only 60 cents!

  • Jeff

    Even in a payday loan operation, there’s time that employees must spend with the customer. It’s probably not as much as the pawn shop example, but it’s a higher risk business. What do they use for collateral?

  • http://wp3.lockergnome.com/nexus/theoracle/ the oracle

    Some will argue that, if you know what the vig is going in, you should be allowed to do whatever you want. Caveat emptor.

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  • Theodore

    As Jeff stated, these are very short term loans, usually 2 weeks. I agree that the percentage rate is a little steep. These “Payday” stores rely on the fact that a customer gets stuck in a loop. Once you get an advance on your paycheck, you have to pay off that advance, then take out another loan to have money until next payday. It’s a viscous cycle. These types of stores know this and relies on it to keep customers coming back. So, in a sense, it is a form of loan sharking.

  • Joel

    It is a short term loan so the APR is not a fair metric to use. Like Jeff said, there is no money to be made if the rates were any less. Payday loans are in place to prevent late fees from credit cards or bounced check fees, which, in terms of APR, can reach over 1000%. Here’s a link to a short video that explains this concept very well. http://www.youtube.com/watch?v=mSWnN9BAol8

  • Missouri

    JAY NIXON NEEDS TO CAP ALL PAYDAY LOAN COMPANIES TO 30% CAP NOT 36%!!! WE ALL NEED TO GET THIS BILL PUSHED THROUGH IN ALL STATES ACROSS AMERICA!! CONGRESS NEEDS TO STOP PAYDAY LOAN SHARKING ONCE AND FOR ALL. IT WOULD BE A CLEANER AND LESS CORRUPT WORLD WITHOUT LOAN SHARKS!