A 36% APR on a 2-week loan = customers pay $1.38 per $100 borrowed.

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Consumer Loan APR Rates

By: Jer Ayles

FALLACY #1: Payday lenders, car title lenders, installment lenders, and all small-dollar loan lenders can earn a profit under a state-imposed 36% annual percentage rate cap.

FALLACY #2: Small-dollar loan customers should simply go to a bank rather than me. My worst critic knows that banks DO NOT WANT my customer! Banks think my customer is a giant PAIN! My customers are not comfortable inside a bank. If you’ve visited a bank lately, you know it requires an act of god to even talk with a banker. Fuhgeddaboudit!

FACT: A report by Professor Victor Stango, “…a 36 percent cap eliminates payday loans. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.)”–Economists Robert DeYoung, Ronald Mann, Donald Morgan, and Michael Strain, Federal Reserve Bank of NewYork  

So-called consumer protectionists and competitors [think pawn shops, banks, credit unions, and lenders servicing 640+ FICO consumers via long-term, $3000+ loans] lobby hard for capping interest rates at 36%.

A 36% Annual Percentage Rate Cap in the real world =

  • $100 borrowed would generate $1.38 per month in interest.
  • That’s equivalent to $.10 per day.
  • A $100,000 “book” [portfolio – “money on the street,” would earn $36,000 per year in top line revenue.
  • In other words, $36,000 per year or $3000 per month GROSS.

The Reality?

  • I cannot pay my storefront rent with $3000 in monthly fee revenue with a $100,000 portfolio!
  • I need 2.5 employees. [How much $$$$ in wages and benefits is that in your locale?]
  • My average cost of capital is 12%.
  • Bad debt. My net chargeoffs are 18%.
  • My CAC is $185.
  • Additional line item expenses include insurance, security, underwriting, phones, utilities, licensing, state audit fees, collections, text messaging fees, and loan mngt. fees, office expenses…
  • Taxes.
  • Accounting, legal & professional fees.
  • Unlike credit unions, various community groups & banks, my business is NOT subsidized.
  • While my competitors technically provide <36% loans to a limited pool of subprime consumers, they evade the 36% APR cap by selling expensive insurance products to their customers, products that are NOT included in the loan’s APR calculation. The result? 180%+ APRs.
  • My customers WANT & NEED my loan products! They know my loan product is expensive. I tell them it’s expensive. The fees I charged are plastered all over the walls of my store and on my website. My team doesn’t hide our fees. EVER! There is no need.
  • My customers desire loans of $100 – $500. Who is going to take a chance on them? Not a bank? Not a credit union. Their friends and family, who my customer is too embarrassed to ask for a loan, are OFTEN in the same boat. Where to turn in an emergency? Food, Car repair, medicine, rent…
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