We’re Not Talking About What’s Right. We’re Talking About The Law

March 18, 2015

One of my favorite TV shows of the 80’s was “WKRP in Cincinnati.” If you’re my age, you probably remember Johnny Fever, Venus Flytrap and of course Jennifer and the infamous Turkey Drop: http://youtu.be/lf3mgmEdfwg. As much as I loved that episode, my favorite quote came from another episode where Mr. Carlson is talking to the station’s attorney about a legal issue. When Mr. Carlson is talking about a situation that is morally wrong, he says, “That’s not right,” and the attorney responds, “Arthur, we’re not talking about what’s right. We’re talking about the law.”

That phrase immediately popped into my head when one of our planner team members shared with me the interest rates that a helpline caller was being charged on their payday loans. You hear us talk all the time about high rate debts, especially credit cards, but pay day loans make credit card debt look like a low rate mortgage. These are the absolute worst kind of debt that anyone could have. They are legal, but in almost every case, the rates are so high that the borrower will NEVER get out of the cycle of rolling one loan into the next without some kind of pennies from heaven.

In this case, the credit card rates were bad…35.99%! Sadly, this was the best rate this person had. The pay day loans started at roughly 70%, another was right around 100%, and the worst of the group was an unbelievable 274%!!! They were borrowing $2,500 and would end up paying $7,697 over the course of the loan! I would say that is criminal, but it’s not. Again, we’re not talking about what’s right, we’re talking about the law.

If you find yourself or someone that you know using payday loans, get out as fast as you can. You may have to go on an extreme budget, borrow from friends or family, your 401k or a peer to peer lending program but anything is better than paying 274% and never getting out from under that burden. Payday loans are vicious products that take advantage of people while they are down. They may seem like the only way out, but in reality, they are an anchor and hold you down.

If you want to do something about these unscrupulous firms and what they do to people, one option is to become a peer-to-peer lender yourself. This can be done with companies like Prosper and Lending Club. The upside is that the loans generally have higher rates than most investment options and you could make decent money if the loans are paid back, but you are taking that credit risk. This is definitely not something that you should consider to be a conservative investment but if you have the money, the risk tolerance, and the desire to take away business from the modern day loan sharks, then you may look into it.