In principle, the debt market charges rates that are commensurate with the risk of repayment. Some studies[0] show a relatively high default rate for payday loans. Moreover, the people who borrow from these facilities likely have very poor credit scores.

That's not a comment on the fairness of the rate charged. But if there is a sufficient amount of competition among lenders, and they were effectively regulated and monitored, we could expect their rates are enough to allow them to make a reasonable profit in spite of the risk of default.

[0] https://thehill.com/regulation/237538-borrowers-default-on-n...

In some country consumer credits are regulated and the interest rate is capped. Also it is not legal in some country to grant a credit if the lender cant't pay it back (e.g. in the european union)

>> Also it is not legal in some country to grant a credit if the lender cant't pay it back (e.g. in the european union

European Union is not a country and every member state has their own rules regulating this, there isn't one payday lenders rulebook across the entire EU.

As for what you said - it's true, except that it boils down to a checkbox on the form "are you able to make repayments on this loan?" and that's about it, that takes care of the legal side of things.

Honest question -- what's stopping anyone from entering the market, offering much lower interest rates than that, and outcompeting all existing participants?

The people that take a pay day loan aren't necessarily maximizing for cost effectiveness.

Consider someone who got a flat tire and it needs to be replaced before the person can go to work. The cost of replacing a tire can be $100-$200. The cost of waiting could cost their job.

They could apply for a credit card with 18% interest and a bunch of fees - and the card MIGHT be delivered the next day. OR they can go to a pay day lender and borrow $100 NOW and get to their job this afternoon.

The tire replacement "should" have cost $100 - now it costs $121, and they keep their job.

You might imagine a similar situation for: your fridge broke and you NEED to keep your food fresh, your heater/AC broke, someone broke your front door trying to rob you.

Life SUCKS if you are poor.

Actual story: I met someone who was returning home on a bus, but was kicked off after having a seizure. She and her bf couldn't afford a new bus ticket to get home (to LA). They were stuck in Houston for at least a week, it is possible they missed work and were fired and missed rent and were evicted. If that was you, how much would you be willing to pay for $500 now? I didn't know them long enough to know if they were telling the truth, but I wish I had given them money.

I'm not sure what this has to do with my question.

I'm not asking why the customer doesn't just go to a bank instead.

I'm asking what's stopping you or me from opening a competing payday loan service that charges "only" $110 instead of $121.

It seems to me that this should be a highly competitive industry, the only barriers to entry being some capital, a storefront in a cheap part of town, and a little physical security? What am I missing?

Oh! Sorry, I totally missed that.

Background: I work at a bank, we specialize in Credit Cards - but I'm in the car finance division. Some of what I have here is an educated guess.

Pay day lenders IS highly competitive. In certain geographies, there are LOTS of lenders. There are some very real barriers to entry:

You have to be credited with certain financial regulators (CFPB and OCC are the 2 I know of) to lend money - and these regulators come with various stipulations (e.g., keep $ in reserve, don't be racist, lend to people who can pay you back, etc)

Many "real" banks avoid this market because the regulators "punish" us - our Credit Card division would be held to a higher standard because we also had pay day loans. Fun fact: during the Obama administration, we also had Mortgages, because regulators "went easy" on the rest of the company. When Trump became president, regulators stopped caring and we sold our mortgages.

All of this being said, if you, right NOW had a lemonade stand lending money to people, you could probably get away with it.

On that note, there is a really interesting shift in the market:

Financial Services As A Service. Imagine: Bank of Small-Town-Maine is a legitimate bank. They know how to stay solvent, they are registered with the right regulators, etc. I approach them and say "let me use your Certifications, I'll use my money, my marketing, I'll buy Identification Services and Credit services - I'll lend money to people and we split the profit".

ACE Cash Express is doing something like this RIGHT NOW - and there are MANY other people doing it, too.

Waiting a day for a credit card isn't the issue. Many auto repair shops now offer instant financing through partnerships with third-party lenders. The problem is that the customers have low credit scores and don't qualify for regular loans.

You are right, and I'll add something, too: the 3rd party financiers will sometimes lend to the low credit score people, but they charge high rates like the payday lenders

And on the point, financing your home appliances is a popular thing (but please, pay up front!)

They do. GP, like so many in this thread, has a poor grasp on the logic here. They're referring to the _maximum_ allowable rate.

Note up top that my comment was in response to someone saying that payday loans per se are a scam, a widely-held view in my social circles which I disagree with strongly.

> That's not using debt as a 'tool', that is weaponizing it against those can't fend for themselves.

Are you familiar with the concept of a poverty trap? We're not talking about people whose financial decisions consist of figuring out how to distribute their securities tax-efficiently across their accounts. There are lots of people for whom there are _very_ few degrees of financial freedom, where not being able to pay for car repairs can mean losing your job which can mean getting evicted, and where a precarious but livable existence can become a financial nightmare trap with a single stroke of bad luck and bad timing.

What's the discount rate on a loan for someone in that position? Why are you so confident that, a million miles away from your situation, you can make that decision better for them than they can for themselves? If someone is underbanked (like 22% of Americans), why are you so sure that a time-sensitive $300 emergency expense isn't worth $360, if they're confident they can pay it back (eg, when they get their paycheck)? If you're actually interested in the well-being of those who feel the need to avail themselves of tools like this, the New Yorker wrote an article about it half a decade ago[1]. There are a million other resources and even studies describing the demand side of the story, but it's a lot easier to just pat oneself on the back about how these poor illiterate people are being saved from themselves and then ignore the people whose weakened access to credit further immiserates them.

> I'm sorry but in Ontario, prior to January 1, 2017, the charge was $21 per $100 advanced, an effective interest rate of 14,299% (not a typo)

There are an impressive amount of things wrong with this short sentence and its implications.

1) This is the maximum allowable rate. It's completely consistent for someone to believe that the worst-possible payday lenders are on-net exploitative without claiming the entire industry is a scam.

2) The parent comment I disagreed with did not say "I was going to a pre-Jan-1-2017 Ontario payday lender, which I know is a scam". He said it of payday loans in general, a belief that's widely held in my social circles for the John-Oliver-related reasons I mentioned before.

3) Nothing in my comment said I was opposed to regulation, up to and including capping rates. Most people (poor or not) are pretty terrible at math, and desperation absolutely can push people further towards irrational decisions. Legally capping rates is a decision that, at a given rate, more people are falling prey to their innumeracy than are availing themselves of a costly but necessary emergency life-raft. There's nothing wrong with this legislative judgment call, but starting and ending your analysis at "look how high this number is!!!!" is just cosplaying compassion.

4) Again, the assumption that just waving your hands in the air and saying a number has any connection to the reality of poverty traps and the incredibly steep discount rates they impose upon people. Removing options from people isn't saving them from their misery, it's just displacing their misery into a million diffuse other problems that you don't have to think about.

[1] https://www.newyorker.com/business/currency/what-good-are-pa...

I dunno, your logic is sound for people who are not in desperate straits, but people make significantly altered (but still rational) risk assessments under duress. If such people are able to get short term funding at any cost, even if they know they can’t repay it, then the personal risk of the consequences of that decision could well rank far lower than the consequences of the alternative, which is for example that your kids starve. That has nothing to do with literacy or saving people from themselves and more to do with access to emergency funding and information.

Even if we accept that payday lending has a place, I think most payday lenders benefit from this equation and certainly contribute to the poverty trap: even if most of the debtors end up getting (likely minimum wage) jobs, they now have the added burden of repaying the onerous rates that they agreed to while under extreme duress. And that duress is the thing that seems to be missing in your calculus.

The problem with payday loans is not the theoretical application of debt theory but the rational risk taking of people with no other (perceived) options: under almost all circumstances, it is better to be starving next week than it is to be starving today.