Payday loan debate

The business magazine BusinessWeek hosted a popular web debate on payday loans. One thing that surprised me was that the responders were overwhelmingly against the payday loan industry. Many of those that held the "treat them like adults" argument had a vested interest in the high-rate financial industry. For example, one worked for the tax preparer Jackson Hewitt, which has come under fire for "refund anticipation loans". I would have expected that it would have been the other way around, as BusinessWeek's readership is primarily made of wealthy business executives.

The San Francisco Chronicle did an article on CashCall in September 2004. They were able to get an interview with Paul Reddam, the company's founder. Some interesting facts were revealed:

• Reddam also founded mortgage lending company DiTech, which was bought by GMAC
  
• Roughly 20% of of CashCall Customers have defaulted on their loans. This is not the default rate, as the company was only established in July 2003.
  
• So far, it has loaned $50 million to 7,000 customers. It must be much more now, as they recently doubled their office space.
  
• At the time of the article, the rates were not shown in neither the TV commercials nor the website. Reddam did say that CashCall did comply with consumer lending laws by disclosing the terms prior to a customer signing the lending agreement. This is a shady area that readers will need to make their opinion on themselves. It should be noted that their rates are now prominently displayed on their website, which is above what is required by the law.
  

Is CashCall a Scam / Ripoff?

When analyzing business practices, it is important to be rational and fair to both sides. Demonizing a company achieves little. Here is my opinion on CashCall's business practices.

1) Financial Disclosure. CashCall is better about this than many other companies. Payday loan providers don't even disclose their APR rate, you have to do the math to figure out a $20 fee for a two-week loan on $100 has an interest rate of over 500%. Tax preparation companies didn't even originally let customers they were actually taking loans when they did "Rapid Refunds". Jackson Hewitt spent $5 million to settle with the California Attorney General over deceptive marketing practices.

CashCall lists financial numbers of its loans very clearly on its Rates Page. It is linked to on its main navigation bar. It even lists the payment amounts and quantity. This is even better than my credit card - I'd have to dig through my monthly statement to find the APR rate. I'm not sure if I'd know how to calculate how much I would pay in total if I only paid the minimum every month.

Of course, this is only in regards to their website. CashCall has an extensive televisionmarketing campaign and ordering directly through the phone might be a lot different. Please comment on this thread if you have any experience in this matter.

2) High interest rates. CashCall does have a very high interest rate of 99%. But it is much cheaper than similar loans. As previously mentioned, payday loans have an interest rate of 500%.

Providers of these type of unsecured, no-credit-check loans need to charge a high interest rate because of the increased default rate. Information on the exact numbers that are available to the public are difficult to come by. The best I could find is that 10.04% of subprime mortgages were past due in mid-2004, compared to 2.4% of prime loans. But remember that mortgages are larger and thus more difficult to get, have credit checks and are secured with property. Also, the default rate of subprime loans skyrockets during recessions, so looking at the numbers when things are rosy doesn't provide the whole picture. Providian was a credit card company that targeted people with low income and bad credit history. They came under fire for bilking the poor with exorbitant rates. But ironically these so-called usurious rates weren't enough. The company almost went under during the 2003 recession and had to layoff about 70% of its 11,000 employees.

3) Aggressive collection tactics. Many customers have posted horrifying stories on RipoffReport.com - multiple calls per day, threats of lawsuits, contacting family members, even coming to people's houses. But unfortunately this is the standard in the collection agency business today. I'd probably get harassed in a similar way if I defaulted on my car loan.

I don't agree with this business practice at all. Many of these tactics are very similar to those of loan sharks. It should be illegal. But CashCall shouldn't be singled out because this is an industry problem. This is very similar to how I view Walmart and it's labor issue problem. Walmart treats its employees poorly, but so does Target and McDonalds. I don't have a specific problem with Walmart; I have a problem with the treatment of low-wage Americans. Likewise, attacking only CashCall for its collection practices is intellectually unsound.

4) Total lack of leniency for customers. Unfortunately, we can only infer about this practice from anecdotal evidence. Based on browsing RipoffReport.com complaints, CashCall lacks any sympathy for the customer. Pleads for extensions for a couple of days are denied. Casey Serin, a blogger who has been featured on many popular TVs and newspapers, worked out a deal with CashCall to give a lump sum in exchange for some breathing room. He got the paper work in a couple days late and the company made it a no-go.

CashCall's typical customer who pays his or her bills on times yields plenty of profit. The high interest rate serves as a built-in buffer for default losses. It should act as a responsible corporate citizen and not squeeze people ruthlessly for a couple extra pennies of profit.

Feel free to let your opinion be heard by commenting on this post.

CashCall Rapidly Expanding Office Space

Apparently its aggressive marketing tactics are successful. CashCall is looking to expand its offices.

According to the Orange County Business Journal:

[CashCall] just signed a deal to lease 127,750 square feet of space ...[it] ...has been looking to sublease as much as 600,000 square feet of space in Irvine, Anaheim and Orange since last summer...The Anaheim move more than doubles CashCall's local space and is the second big office lease it has struck here in the past 18 months. CashCall signed a seven-year deal for its current headquarters, which totals about 100,000 square feet, in mid-2005. It added another 30,000 square feet of space in Las Vegas late last year.

Welcome to the site

This site will follow CashCall, a rapidly-growing consumer lending company. They have been accused of unsavory business tactics. We will try to provide unbiased information on this divisive topic.