Ernst & Young National Study Confirms Pricing of
Payday Loans is Fair and Reasonable
October 15 2009
Source: PRNewswire
Based on the study findings, it is clear that attempts to impose artificial rate caps will result in the elimination of a product used responsibly by millions of Americans to address small dollar, short-term credit needs.
HACKENSACK, N.J., Oct. 13 (PRNewswire) –
In order to address unsubstantiated claims regarding the
cost of small, short-term loans, also known as payday
advances or loans, Financial Service Centers of America,
Inc. (FiSCA) engaged the firm of Ernst & Young LLP to
perform an economic survey analysis of the cost to provide
consumers with this form of credit through stores that
offer many other financial products as well (also known as
multi-line operators). The data obtained through this
nationwide survey of FiSCA members clearly illustrates
that payday loans are priced fairly and reasonably for
consumers seeking small dollar, short-term loans to
address unexpected financial shortfalls.
Further, based on the study's findings, it is
reasonable to conclude that imposition of arbitrary fee
caps will cripple an industry that operates responsibly
under a variety of federal and state regulations to
provide this form of credit to millions of cost-conscious
Americans.
Among the findings of the Ernst & Young study:
- The average revenue for multi-line payday advance
lenders for every $100 loaned is $15.26. At the same
time, the store-weighted average cost to lenders
equaled $13.89 for every $100 loaned.
- On a pre-tax and pre-interest basis, multi-line
payday advance lenders earn an average profit of $1.37
per $100 of loan principal issued - that represents a
modest margin of 9.1%, before taxes.
- There are no collateral requirements for a payday
loan, so lenders in this industry face a much greater
risk than lenders offering loans requiring some form
of collateral. According to the Ernst & Young report,
the store-weighted average bad debt costs equaled
$3.74 per $100 loaned, or 26.9% of the total cost of
each loan issued.
"Based on the Ernst & Young survey findings, it is
reasonable to assume that reducing the fees charged by
multi-line payday advance lenders, such as through rate
caps, would have a significantly adverse financial impact
on the industry," said Joseph Coleman, Chairman of FiSCA.
"If multi-line providers are currently only earning $1.37
in pre-tax profit for every $100 loaned, then it stands to
reason that significantly reducing the fees that can be
charged for offering such products, such as proposed in
various pieces of legislation pending in Congress and in
some state legislatures, will have a significant impact on
the multi-line payday loan industry, which includes an
estimated 10,000 locations nationwide."
The typical payday loan is for a duration of
approximately two-weeks. The average cost of $15.26 in
fees per $100 borrowed on such a loan equates to an annual
percentage rate (APR) of 397%, a cost disclosure that is
required by the federal Truth in Lending Act and
Regulation Z, but which is an inefficient and
inappropriate tool when applied to payday advances or any
other small dollar, short-term credit product. Proposals
in Congress and in various state capitals call for
reducing the rate to an APR of 36%. If enacted into law,
such a fee cap would render payday advances unprofitable,
forcing all lenders to cease offering the product and
creating a void in the marketplace.
Another aspect of payday loans often overlooked is the
high fixed costs associated with offering the product. The
following chart breaks down these costs and illustrates
them in relation to the revenue and pre-tax profit
generated from the typical payday loan.
Revenue, cost and pre-tax profit for the average
payday advance of the E&Y survey
Payday advance revenue, cost and profit (pre-tax basis)
-------------------------------------------------------
Store-Weighted Average
Per $100 Loan
-------------
Revenue $15.26
------- ------
- Operating Cost $9.41
- Cost of Loan Capital $0.07
- Cost of Supplementary Capital $0.67
- Bad Debt Cost $3.74
--------------- ------
Loan Cost $13.89
--------- ------
Profit (pre-tax) $1.37
--------------- ------
The survey of FiSCA members offering PDA loans was
conducted during the summer of 2009. In total, information
from 2,687 stores, approximately 27% of the multi-line
locations in the United States, was included in the
survey. The survey can be found by visiting
www.fisca.org.
About FiSCA
FiSCA, founded in 1987, is the national trade
association for more than 7,000 individual financial
service centers across the United States. FiSCA members
provide a wide variety of financial services and products
to their communities, including check cashing, money
orders, money transfers, and electronic bill payment
services, automatic teller machine access, government
benefit and payroll payments, small dollar short-term
loans, electronic tax preparation, prepaid debit cards,
deposit acceptance services, public transportation fare
and token sales, motor vehicle license plate and title
distribution, postage stamp sales and numerous other
services. For more information, please visit
www.fisca.org.
SOURCE Financial Service Centers of America
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