Banks continue to be embroiled in the middle of it all. From Bank of America to Citigroup, every major lender has shouldered its share of the blame both financially and in the public perception — and America’s biggest financial institutions continue on an uphill battle toward becoming salient businesses once again…

But while the big-name banks wean themselves from Uncle Sam’s till, the seedy side of the finance world is seeing significant growth.

Payday loans are one of the most controversial topics in banking. With APRs that start around 600% and maximum loans of $500 as standard, it’s no surprise that payday lenders are decried as the worst financial predators.

If you’re not familiar with payday loans, typically, they work like this: Someone in need of cash goes to a payday lender’s office to take out a small short-term loan of $100 to hold him over until his next payday. To do that, the borrower cuts a postdated check for $126.40 (the principal, plus $26.40 in fees, a 688.29% APR) made out to the lending company. Finally, the payday lending company cashes the check on the date the loan is due, 14 days later.

I’ll admit, it’s easy to succumb to the emotional argument against payday lenders…but digging a little big deeper into the numbers yields a somewhat different story.

Understanding Interest Rates

In the U.S., we’ve become accustomed to the mind-set that the difference between our credit card APRs and the prime rate (the lowest reference rate used by banks) was some sort of punishment levied upon us by our financial institutions of choice. That’s not a shocking concept when you consider the fact that lenders “punish” borrowers who default by hiking up their interest rates: Make a payment three days late? Well, now you have to pay us 30% each year!

Consumer punishment through APRs is the very reason behind the credit card reform that took hold back in February. The problem was that banks were hiking rates to beef up their bottom lines. Changing interest rates isn’t designed to be a profit center — it’s supposed to mitigate risk for the lenders…

If a customer has a history of making late payments — or blowing off his creditors entirely — charging him a higher interest rate is the bank’s way of making up for the fact that a higher percentage of that client base will default. As with small-cap investments, risk entitles investors to potentially higher profits; in this case, the investor is his bank.

But it’s not about greed. Over the long run, random risks even out — in other words, a random portfolio of higher risks at higher interest rates should yield the same as a random portfolio of lower risks at lower rates.

So what does that mean in the world of payday loans?

Simply put, payday lenders provide a necessary service for customers with no other options. If someone with awful credit doesn’t have the cash to pay the power bill this month, their options are to turn to a payday lender or to let the power get shut off.

And while the public is duped into thinking that payday lenders are gouging their clients with exorbitant fees, the truth is that triple-digit APRs are a necessary evil for an industry that sees several times more uncollectable debt than a prime-lending bank. But although profitability for payday lenders and cash advance companies isn’t necessarily any better or worse than investors would see at a regional bank, organic growth and misinformation are making this industry an attractive buy right now.

The Path to Payday Profits

While the credit market ground to a halt back in 2008, it was a completely different story in the payday loan industry — since payday lenders already dealt with the worst tranche of borrowing risks, they were mostly able to continue business as usual during the crunch. One thing that did change was their customer base.

With credit nonexistent at traditional lenders, better credit risks were actually pushed to payday lenders to keep their finances afloat. That’s meant payday loan operators have had larger numbers of more reliable clients in the last couple of years. But because of the stigma attached to payday loans, they’ve been eschewed by investors not willing to actually look past public perception.

That’s left some of these consumer lenders trading at a significant discount right now.

A couple of payday lenders worth looking at include First Cash Financial Services (NASDAQ: FCFS) and Dollar Financial Corp. (NASDAQ: DLLR) – two companies that Penny Stock Fortunes readers booked double-digit gains on in the past.

Sincerely,
Jonas Elmerraji
Managing Editor, Penny Sleuth

June 23, 2010

Why Payday Lenders Could Lead to Your Own Payday in 2010 was originally featured in the Penny Sleuth.

“That evening, I received a phone call from him to look at my car and that ‘it’ would happen to me if I didn’t pay up.”

The next day, the woman received another call, this time from her brother-in-law who had been using her car. He told her that a bomb had blown her car to bits.

This is not a scene from a classic mobster movie. This story is, in fact, a true account of a 1960s loan shark case in Yonkers, N.Y. The woman – who remained unidentified in news reports – told just one of the many horrific stories about threats and violence used by infamous loan shark rings throughout the country.

Many of the stories involve physical harm, irrevocable monetary problems and even murder. Luckily, we don’t hear of these types of cases anymore. With other financial options opening up over the last several decades, the need for loan sharks has put many of these criminals out of business for good.

A Painfully Dismal 2009 Forecast Uncovers a Profitable Opportunity

Millions of people all over the world are facing tough financial times these days. All the pundits have compared this economic downturn to the Great Depression. And yes, there are some similarities.

Economists expect unemployment will reach between 8.5-10% in 2009. The only stock market to post a gain last year was Tunisia – a small North African country. Mega players like the UAE and Iceland were all but wiped off the international investment stage.

Home foreclosures are expected to reach an all-time high this year, which will only add to the unbelievably high rate of homes for sale. Prices are still crashing – currently sitting about 35% below a year earlier.

Credit is nearly frozen. Banks and credit card companies alike are buckling down and leaving very little money free to loan out – even with the drastic actions undertaken in Washington.

We aren’t writing this to shock you. But you have to understand how bad it’s getting for some families. Bills don’t go away when the economy turns sour. And many people will need to turn to short-term lenders to get through these tough times.

The Solution to Millions of Americans’ Financial Problems

Many view payday loan shops as corrupt, greedy modern-day loan sharks. That’s simply not the case. These payday loan companies are providing a needed service. And as today’s current economic situation worsens, payday loan shops are cashing in.

No one likes to hear of families being turned out of their houses because of missed mortgage payments. Cash advance businesses offer a solution to these millions of families. Instead of eviction, one solution for a working family is to take out a short-term seven- or 14-day payday loan. Obviously, this is the last option. But faced with foreclosure, it’s becoming a more frequently used solution for many who never thought they’d be in that position.

Families facing foreclosure aren’t the only ones running to cash advance stores. Many are taking out payday loans to fund unexpected expenses. With more families living paycheck to paycheck than ever before, even paying for the basics is becoming difficult. Electric, telephone and grocery bills are becoming huge hassles for many.

In our newest issue of Penny Stock Fortunes, we’ve found one company that has its hand in many essential services that millions will inevitably look to over the next 12-18 months. This business is a key player in payday loans, check cashing, and money transfers. You can learn all about this great penny stock play by clicking on the link below to sign up for Penny Stock Fortunes…

Sincerely,
Jim Nelson

January 16, 2009

Profiting from Payday Loans in 2009 was originally featured in the Penny Sleuth.