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Online cash advances Are For Consumers with Steady Income It is simply untrue that online cash advance companies prey upon people who don’t have the money to repay. Only those with a verified steady income are eligible, a safety measure for both the consumer and the lender. An analogy Huckstep uses in his important study “Payday Lending: Do Outrageous Prices Necessarily Mean Outrageous Profits?” is that online cash advances are like a financial taxi: “Expensive for long trips, but perfectly viable for short distances” (Huckstep, 2007, p. 207). Used properly, online cash advances can save consumers a great deal of money over more catastrophic alternatives. This is a fact that reputable payday lending businesses stress to consumers through their literature and service counseling. But Are Online cash advances Too Expensive? That’s what critics say, and the key defensive position has been that high risk justifies the price. Gold points to the 2005 FDIC study by Flannery and Samolyk “Payday Lending: Do the Costs Justify the Price?” in support of the defense, but Huckstep counters that “while loan losses may be high… that seems to be a trait of the lending industry generally, rather than a unique trait of payday lending institutions” (Huckstep, 2007, p. 230). Looking at said charge-off rates, Gold finds the ratios (dividing yearly charge-offs by the amount of originated loans during that period) between payday lenders and traditional lenders to be rather similar, and very much in keeping with overall Fed averages. In fact, the average for online cash advance default is shown in Huckstep’s study to be below those of credit cards. This suggests that consumers are indeed able to handle their online cash advances when compared with other kinds of consumer lending. Do Payday Lenders Reap “Obscene” Profits? Overall, multiple sources confirm the truth that payday lenders have enjoyed greater profits in recent years than traditional lenders based upon similar products. But Gold would have us understand that from 2006 to 2008, the profit margin above the “break even” point for the major online cash advance companies decreased dramatically. There are numerous reasons for this, but Gold intimates that a lack of growth opportunities within the payday lending industry may have something to do with it. Whether this is because the industry has become overgrown and needs pruning or overzealous regulation has hamstrung businesses in too many states is debatable. From the standpoint of the numbers, loan volume is considered to be the key to online cash advance storeprofitability (rather than exorbitant rates). Growth and competition have a definite impact upon loan volume on a per store basis. Gold believes that consumers are attracted to online cash advance locations primarily because of convenience, so expansion of store locations and operating hours are necessary to compete. However, venturing beyond a saturation point may actually decrease profits. Good Return on Assets and Equity Online cash advance business, according to Gold’s findings, produce a greater return on assets (ROA; the ratio of operating income to average assets), which indicates that they are more efficient at what they do than banks and credit unions that offer similar products. Considering that online cash advance companies tend to have a relatively small number of physical assets when compared with big traditional lenders, the payday lenders experience much less loan turnover and require much less operating capital in order to produce positive returns. Does this mean that shareholders of online cash advance companies are making a killing? Relative to traditional lenders, the equity tale of the tape says no. Gold finds that from 2004 through 2006, online cash advances originators and traditional lenders were basically dead even. By 2008, however, the subprime mortgage crisis sent traditional lenders plummeting. Payday lenders readily took up the slack of consumer demand and posted a much more positive return on equity. Scale Down, Payday Lenders? Gold appears to lean toward the idea that if “store density is a function of price, then a reduction in density would increase loan volume and profit at remaining stores.” In such an instance, payday lenders could conceivably charge less and still collect a decent profit. A reduction in competition would then help consumers. Online cash advances could continue to satisfy consumer demand, provided the constant attack mentality of legislators (who no doubt receive sizable campaign contributions from traditional lenders). Some regulation is beneficial (since there are lenders with room in their profit margins to decrease price), but a 50 to 75 percent reduction in APR will only serve to put legal businesses down and increase unemployment. Cooler heads must prevail. As Gold puts it, Get your online cash advance now
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