Vanguard in Action

There is clearly a demand in the United States and other developed western countries for payday loan services. Billions of dollars are borrowed each year from these companies from consumers who mostly have poor or no credit.

The question is are they a good and bad thing? This question is even more important given the broader credit crunch that is going on in the United States. The answer like many depends very much on who you are and where you live.

Clearly, payday loans are good for the companies that issue them. If they weren’t then companies would stop offering them. The fact that the industry has grown so large (e.g. 2,500 outlets in California alone) shows that it must be an extremely profitable industry.

So, are they good for consumers? Well people are clearly interested in the services, otherwise there would be no companies offering them. Moreover, no one is forcing people to sign-up for these services.  For some people payday loans are the only way to get cash quickly when they need it.

Having access to credit, even at a high interest rate, is often better than not having access to it. Nevertheless, consumers should be aware of some of the psychological tricks these companies use to make it seem like your loan is cheaper than it is.

Usually, payday loan companies will charge you a fee (e.g. $25 for every $100 borrowed) that masks the true interest rate. Credit cards interest rates are usually never more about 30% a year. On the other hand, when you factor in the rates charged by payday loan companies you can get equivalent interest rates of over 1,000% per year.

In conclusion, payday loans are a useful service to people in need. However, consumers should be made aware of just how much they are paying. The fees might not seem like much when you take out the loan but they quickly eat in to your income.

Thus, you get into a psychological mindset of dependency which can be very hard to break. Use payday loans cautiously or not at all and you will avoid these problems all together.

Welcome back to vanguard in action. This blog is now under new management and as a result will focus on slightly different topics. Instead of simply focusing on loans, it will focus on the psychology behind loans and business in general. This will return the blog closer to its origins.

I hope you enjoy the upcoming changes and the new direction the blog takes. If you have any concerns or questions please feel free to leave your comments below. Moreover, if there is anything you would like to read about please let me know.
From the New Management here at Vanguard In Action

Arizona senator Robert Blendu, R - Litchfield Park, has made a proposal to push the deadline for the law that would essentially eliminate the payday loan industry in Arizona back from 2010 to 2012. He proposes that the state Department of Financial Institutions would examine the number of loans made to Arizonans and the amount of money the payday loan companies collect. He hopes that this may give state legislators information that would persuade them to keep payday loans legal in the state. The proposal has been met with plenty of opposition, though. Rep. Marian McClure, R - Tucson, has called the payday loan industry, “an equal-opportunity predator”, and ridiculed Blendu for the proposal. She pointed to the fact that lenders are charging 15 percent interest on payday loans, which equates to a 400 percent annual interest rate. It is likely that the proposed ban on payday loans in Arizona will continue as scheduled, unless Blendu can drum up more support for his proposal.

A lot of people today are refinancing their auto loans, but they don’t realize what a mistake auto loan refinancing can be. They think they can increase their cash flow by refinancing the auto loan, but several negative things can happen. First, cars usually depreciate sharply. Around 45% in the first three years, according to Consumer Reports. This leaves borrowers with an “upside down” loan, that is owing more than the car is worth. Also, amortization begins again with a new auto loan, which basically means early payments cut into faster than the principal. This could leave you with another “upside down” auto loan. Not only that, your payments won’t drop much, unless you increase the number of months you are paying the loan over, which is more expensive. The only reason I can think of to refinance you auto loan would be if you bought a car when you had bad credit and have an extremely high interest rate. Then, it would make sense to refinance the car loan, lowering your interest rate by a significant amount.

Student loan provider Sallie Mae reported their fourth quarter earnings on Wednesday. Sallie Mae’s fourth quarters sales were just under one billion dollars. Analysts see this as a positive for the loan company who has seen plenty of recent troubles. The student lender recently saw the collapse of a $25 billion buyout offer, has been entangled in subsequent litigation and has faced dissatisfaction among investors over large drops (Sallie Mae shares lost 60 percent in the fourth quarter, ending the year at $20.14) in Sallie Mae stock. It may be too early to tell if Wednesday’s news will significantly help the loan company’s image and stock prices, but any good news is welcomed at this point.