What Businesses Charge
I had an interesting revelation when I was a teen and working in the stock room at my local JC Penney. When inventory arrived, I was to put the price tags on the items. The sheet that I was given to derive the prices from also had the store’s own cost for those items. The markup was always 100%. If you’re paying $20 for an item, the store paid $10 for it. Sounds fairly reasonable? Or should we tell JC Penney how much they should be able to mark up its items? We don’t. We simply let the market dictate whether JC Penney sells that item for $20 or it stays on the shelf.
So why exactly do we want to do the same thing with payday lending? Certain legislators in the state don’t like the amount of markup on short term loans that businesses give to people. They want to cap how much the business can charge for these transactions.
It’s also interesting that explanations for the proposed bills are always using these drastic annual percentage rates, numbers like 260%. But how does it work for real? I asked Jamie Fulmer, the Senior VP of Public Affairs at Advance America what it would cost me to borrow $1,000 and pay it back in full a week later. He replied that the maximum I can borrow in Rhode Island is $450 and the interest on that loan, whether it was paid back in a week or two weeks would be a flat $45. I don’t think it’s be unreasonable to call that a 10% markup. Keeping in mind that this is intended to be a payday loan, which means it bridges someone over until their next payday. This isn’t intended to be some long-term mortgage kind of thing.
Over on Twitter, the Providence Journal’s Phil Marcelo filled me in on a couple questions I had like what are the lenders’ reported profit margins. Using this source, one payday lender, Advance America had a 10.4% profit margin, less than companies like Mattel, Hershey’s, IHOP and Tempurpedic. I don’t see anyone trying to curb the costs of candy bars or pancakes.
I think we all know what would happen if you drastically cut the amount of profit that a business can make when they’re already not exactly operating at a ridiculously high margin. They’ll go out of business. Gee, isn’t that a great idea. Let’s chase businesses out of Rhode Island. We have too many of those already.
My next question was if people do depend on these types of loans and the legal, aboveboard, taxpaying businesses are chased away, what will people do for their monetary needs? Marcelo said the responses he’s gotten have included that new non-profits will provide small loans at lower rates or people will simply have to cut back on their expenses. If there are non-profits willing to jump into this business at a lower rate, where are they? They’d single-handedly put companies like Advance America out of business, legally. Why don’t we see these starting up? We know the answer. At a lower rate, you lose money. Oh, I firmly believe that if the lenders are chased away by business regulations the void will be filled, there’s no doubts there. However, it’ll be filled by those who will charge a whole lot more. Some online lenders have been known to charge as much as 1,000% on the loans. Who knows what the guy down on the corner or at the local bar would charge. And I don’t quite think he’d simply repo your car or put a lien on your house if you missed the payment.
Why are we trying to protect people from themselves? Do we really want and need more anti-business regulations in Rhode Island? Apparently some members of our General Assembly think we do.