Why I Love Payday Loans
This isn’t going to be some post about why I think payday loans are a great investment. I’ve never gotten a payday loan myself, so I’m not talking about my personal user experience either. I’m not even going to discuss whether payday loans are good or bad.
What I’m talking about is how payday loans are helping me get a good return on my money! No, I’m haven’t started a check advance loan business that lends money out to people at 200% per year. I’m just helping out people who are already stuck in the vicious cycle of payday loans and who can’t seem to get out of it.
Payday loans come with fees that usually range between $15 and $50. Assuming you’ve taken out a $100 loan for 2 weeks until your next pay period. You’re charged $15 which is 15% of your total. This works out to 390% annualized, so if you can’t pay off the $100 and it rolls over a few times, pretty soon you’ve paid 50% interest. Some people get into a situation where they can’t pay off the first loan and they take out a second one. Eventually they’re paying a few hundred percent interest and they can never get out of this cycle.
That’s when they hear about Prosper and use it to try and break the vicious cycle. I’m currently lending money on about 50 loans on Prosper. About 10 of them are payday loans. While I’ll have several defaults in the past 18 months, none of my borrowers who borrowed to pay off their payday loans have ever defaulted. I’m not sure if such borrowers are statistically less likely to default than other borrowers, but from my experience (which could be biased due to my personal lending criteria) it certainly seems that way.
I think if a borrower is paying 200%+ in interest to payday loan business, he’s ecstatic at paying me 27% a year. At least he knows he can pay me off in 3 years, unlike the other place where it seemed like a slow death-spiral. I’m overjoyed at getting an buffett-matching rate of return on my principle too. It’s the perfect win-win (except for the check advance loan guys!).
That’s why I love payday loans. They make me look good! And of course I love Prosper for making this possible.
Payday loans can be helpful, if you use them responsibly. Never get a cash advance that you can’t afford to pay back on time. Make sure you know what you’re getting yourself into before taking out one of these loans.
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March 13th, 2008 at 6:51 am
I would be deathly afraid to lend those people money. People who get payday loans are *generally* the worst money managers on earth. Personally I would be afraid that I would never get paid.
Of course, those returns are astounding! And tempting… just not sure how tempted I am
March 13th, 2008 at 8:49 am
LOL– well said ! You are offering something more attractive than they are, cool.
March 13th, 2008 at 10:03 am
I would be very careful with Prosper loans now especially in this environment.
If people are walking away from their houses, and not paying their credit card bills – what will stop them from defaulting on Prosper loans?
I’m currently getting a wonderful -10% return on my money with Prosper, with 2 loands defaulted, 2 more on the way to being defaulted, and one with a month late (probably is going to be defaulted as well)
March 13th, 2008 at 10:18 am
Pavel,Llama you both bring up very interesting points.
I do not lend to people who are borrowing for home repairs, cars, real estate investors and business-purchase financing.
The reason is that there is much cheaper alternate finance available and if they were turned down there, you shouldn’t be lending them money.
I now personally vet all the loans. The ones that were part of Prosper’s automatic funding process have had a significantly higher default rate that the loans I manually chose.
March 14th, 2008 at 8:15 am
I hear you on the side of prosper looking good from that perspective, but before that was around, my wife had racked up considerable debt that we just had to grin (or not) and bear it and pay it off fast. I agree with you on that front, but the title got me thinking at first that you were nuts, but yes, it makes sense now.
March 15th, 2008 at 3:43 pm
I was curious about how much you fellow investors place into a Prosper portfolio as it relates to your whole portfolio. I like the idea of diversity, which I am dollar cost averaging into some other asset classes that have capital appreciation potential as well as income generating potential. I’m intruiged by the website and its premise and would like to be involved, and from just personally looking at the site and the system I was thinking I may try dollar cost averaging somewhere around 5 to 10 percent of my total portfolio into something like this. Does this seem high to you all? I guess I would expect to generate from 8 to 10 percent return from this portion. Are those of you that utilize Prosper achieving those types of returns? I understand that you can ‘climb’ the risk ladder on Prosper and achieve higher rates of return, but with substantially greater risk. Another quick question, I have noticed they have ‘portfolios’ that they will allow you to place money into i.e. a ‘A rated’, ‘AA rated, ‘B rates’ with different rates of return based on the risk of the lending. Do any of you utilize these ‘model portfolios’ or do you prefer to attempt to assess the risk yourselves and loan on an individual basis. I am fairly young only 37, and have a fairly small overall portfolio of investments, about 200K right now, but am adding monthly to the principle and attempting to grow the principle through monthly income strategies linked with capital appreciation strategies. Thanks for your time and I appreciate the feedback in advance. I enjoy the informative posts and ideas for passive income strategies that everyone contributes here.
March 15th, 2008 at 3:48 pm
PS. On a side topic, as far as payday loans providing any investment opportunity. They have had their ‘day in the sun’. I caught a huge move in the space a couple of years ago through the larger public companies in the space. (EZPW) EZ CORP; (FCFS) FIRST CASH FINANCIAL; (CSH) CASH AMERICA. They all appreciated about 300% from mid 2005 to about early 07. Since then, free fall. The only one left in my portfolio is (CSH) CASH AMERICA. It has held up relatively well for the last year and provides some trading opportunitites and pays a small dividend. Saturation in the space and potential heavy regulation by state governments turned investors away from these high growth plays. I believe there time will come again soon, because they provide a necessary service in our economy, but I caution anyone from jumping into these as I have followed them closely for the last few years.
March 16th, 2008 at 2:03 am
I’ve been to the site but the ‘Join Us’ request isn’t hyperlinked and there appears to be only two options.
Receiving a loan or making a loan.
Perhaps my browser is making life difficult. Where can I find more comprehensive information about the whole system?
Cheers,
Pete.
March 31st, 2008 at 6:27 am
I have a couple Prosper loans where the borrower is using it to pay off these payday loans and other high interest accounts in exchange for our loans. So far so good, they all have paid back on time, no defaults.
April 8th, 2008 at 12:27 pm
I am concerned about the type of people who go out and get a ‘payday’ type loan. These are people who:
Don’t have money.
Don’t really understand the contracts they are signing.
Don’t have credit to get a decent credit line from the bank.
Many are crack heads, etc, that have used payday loans to get a quick buck for the next high. A bad bet all the way around.
It seems to me that it only takes a few defaults to kill your return!
June 6th, 2008 at 7:21 pm
Mike Dee, I completely disagree with your idea of the types of people that apply for payday loans! I sell payday loan leads to lenders and I can tell you that 80% of the leads that I sell, are from people who make $3000/mth or more.
“Crack Heads” and such type people do not get approved for payday loans because they obvious do not meet the requirements that lenders ask for.
The vast majority of those that use payday services, do so because their credit is not good and when they have unexpected situations come up, they cannot turn to your typical lending institution.
July 6th, 2008 at 11:08 am
[...] Off Dividends and Passive Income talks about Why I Love Payday Loans. This is one of the most common reasons borrowers seek a loan on Prosper due to the interest rates [...]
July 6th, 2008 at 4:00 pm
Terrible idea, and the public payday lenders are night and day different than the small ones.
They lend at 360% APR for a reason. Look at their margins. They are no higher than any other business. That should tell you 360% is the right #. Now if you believe you have a default free niche via prosper, that seems ridiculous. 1 default wipes our 4 good payers, and the industry average is about 25% default rate, so unless you’ve tapped a hidden goldmine of 1% defaults, you will suffer greatly at 27% APR. Also, you are not on any public database now. So they can go to a payday lender and get ANOTHER payday loan, since it now looks like they have no debt outstanding. They’re more likely not to pay off Joe Schmo b/c how are you going to report them to the credit agency? You can, but you’re way less likely. Plus, you’re not as efficient in terms of ACH collections. I think it’s a terrible idea. I’ll stay far away.
October 5th, 2008 at 5:47 am
Is there an equivalent to Prosper in canada ?
November 16th, 2008 at 7:23 am
What happend to usury laws in this land? Interest I am reading about here used to be Al Capone business and they became illegal. They are obviously legal now. For how long?
Do’nt you parazite here on this board have any feelings of guilt, charging such a high interest rates?
In my mind you are criminal thieves and laws reflecting that should be placed in law codes again in every state.