If there’s anything more hated in the world of personal finance and online money talk, I’ve yet to encounter it. And y’all know how much I’m hated.
Yes, I’m talking about the financial equivalent of doing meth off of a hooker’s cleavage, the payday loan. Feel free to become outraged enough to throw things at your computer screen. In fact, I insist.
There have been some changes in the industry since the last time we last looked at payday loans, back in 2013. In Canada at least, legislation has been put in place that caps interest rates, restricts the amount of late fees that can be charged, and limits the number of times a borrower can just pay off the interest, which lets them stretch out the loan. Hell, Quebec and Newfoundland went a step farther, essentially banning payday loan shops from setting up in the province. In Quebec, you can only charge people a maximum of 30% interest, compared to 59.5% everywhere else in Canada.
No, that’s not a typo.
These changes have actually proven pretty disastrous for at least one payday loan company, The Cash Store. (I went once, expecting to be able to buy cool old banknotes or money from other countries. It was the biggest piece of false advertising since Otto went to Stoner’s Pot Palace.) The company basically got kicked out of Ontario because it refused to play by the new rules, and it had to declare bankruptcy. A company called Easyhome ended up buying all the stores, ultimately proving being a rebel never pays.
At least that’s what my mom told me. She also said I was handsome.
Easyhome was big into the rent to own business, AKA the easiest way to spend $3000 on a $1400 couch EVER. It was a natural progression for the company to get into the loan business, so that’s what they did, calling it Easyfinancial. But instead of offering payday loans, they offer loans for anywhere from $500 to $10,000 for a time of 9 to 48 months.
The interest rate?
You guys are gonna like this. It’s 46.96%
Now before you get all outraged (too late, probably), consider a few things. First of all, it’s actually much cheaper than a payday loan, which charges 23% (in Ontario and Alberta, anyway) for just a couple of weeks. If someone does two payday loans a year, they’re paying the same annual interest rate as an Easyfinancial. They also approve about 80% of borrowers, and will do so pretty quickly. That’s what these types of lenders specialize in. I don’t care what business you’re in, it’s stupid to try and change a customer’s mind.
Easyfinancial has gotten to the point where it’s pretty big. It has more than $200 million in customer loans outstanding, which, at a 47% interest rate, looks to be a license to print money.
But as you all know, the world is not quite that simple. In 2014, the whole company (including the rent to own furniture business) made just $19.75 million after taxes, interest, and other expenses. There’s nothing wrong with 5% net margins, I know I sure have invested in companies with worse. But it’s hardly the cash cow many people envision.
Why? Because there are expenses, obviously, but the big hit to earnings comes from all the write-offs. Write-offs have averaged more than 15% over the last six years. Compare that to a bank, which is writing off between 0.1 and 0.2% of their mortgages. Credit cards are higher, but still. That’s a lot of write-offs.
Don’t fight the Easyfinancials of the world
According to Easyhome, the Canadian credit market breaks down something like this:
- Prime consumer credit: $450 billion
- Below prime consumer credit: $65 billion
- Payday loans: $1 billion
The Canadian banks essentially control the prime market. If the average person reading this needs some money, they’ll go to a bank or bank equivalent. Most of the time, the bank is happy to deal with them.
But what about the person who can’t qualify at the bank?
According to the average personal finance blogger and concerned-type person, they’ve got the following options:
- Improve your credit and go back to the bank
- Do without, nobody needs credit
- Have an emergency fund!
- Force the banks to lend to everyone
You can see how these aren’t viable options for somebody who needs the cash now.
Now don’t get me wrong. I’m still a believer that most of the time, somebody running out of money is their own fault. We all know guys who make a decent amount of money but still struggle to make ends meet on account of their own stupidity. And a lot of the loans issued by somebody like Easyfinancial are for things people don’t really need.
But we’re all hopelessly naive if we think there isn’t a need for these types of loans. We can’t just will people into being good with their money, no matter how hard we try. There will always be a subsection of the population that refuses to get better. There will also be a subsection that falls onto hard times.
To anyone who really thinks Easyfinancial and their peers are ripping people off, I propose a challenge. Open a business that lends people money at 6%, while helping them get back on their feet financially. Make them attend a monthly budgeting meeting, and help them along with the whole process.
If you do, I’m willing to bet your store will be empty, while 14 different kinds of dirtbags steadily stream into the Easyfinancial office. These borrowers don’t care about improving. Then just want the money, dammit.
Understand that, and you understand the need to those kinds of lenders. It’s that simple. They’re like cockroaches, they will always exist.