History shows the first hard-money loan, or as we call them today, “pay-day” loan was created in the early 1700’s. I call your attention to Benjamin Franklin’s autobiography. When he first arrived in Boston he wanted to set up a printing shop, but needed a lot of capital to buy the presses from a manufacturer in London. So Franklin went back to England and got a job as a printer. There he observed that his co-workers liked to go out on the town on Friday nights and drink beer, but often lacked the cash to pay for it. So he decided to set up his own hard-money lending company and loan out small amounts of money to co-workers to use each weekend, only to repay him double upon payday.
In just a couple of years Benjamin Franklin was able to pay cash for all the equipment he needed to set up his printing business in Philadelphia. We all know the rest of his famed story and how he retired at age 53 and was credited with getting France to bring their ships and soldiers into the New York Harbor to show their strength in support of the 13 colonies. This was a big factor in the British deciding to give up the battle. Franklin was very creative in so many ways. It was this creativity that helped set him up in America, funded by the foolish waste of the men who did not know how to handle their money and who wasted their work and wages on beer.
While most reasons for taking out a loan that charges a hefty interest rate, such as those provided by Franklin, are usually not justified, there are times when money is needed quickly and someone who has the funds to provide that money immediately can be a life saver. I’m sure Franklin’s concept and the need for immediate cash for an emergency were the basis for our modern-day pay-day loan stores, but let’s face it, these facilities have gotten completely out of hand.
Just a couple of years ago, the Deseret News based in Salt Lake City published a map of the Unites States showing how each state handles its pay-day loan activity. Five states, Utah, Nevada, Idaho, South Dakota, and Michigan have no limit on the number of stores they can operate or the interest rate that can be charged. Nine states, Arizona, Maine, Vermont, New York, Massachusetts, Pennsylvania, Virginia, North Carolina, and Georgia, along with the District of Columbia don’t allow them to operate in their state at all.
Out of curiosity, I decided to go to one of these stores in my area to see how I might obtain a $1,000 loan. Armed with the power of Money Mastery Principle 5, Know the Rules, I was ready for anything I thought they might throw at me. The application was a simple one-pager, which asked for six references of family members or close friends that they might call to see if I was credit-worthy. That was it. I asked if they were going to call my references, and was told “yes, most definitely.” I then asked for the interest rate I would be charged on $1,000 and was told 28 percent. I said I thought that was very high. I was told if I didn’t want to pay this that I shouldn’t apply.
As I left this pay-day loan store (of course without pursuing the loan), I was wondering if I could find someone to interview who had actually used such a facility. Within a week, I had a client call me and ask if I could help her daughter who had obtained a pay-day loan for $600 and could not pay it back on time. This was my chance to interview an actual short-term/high-interest borrower! I called my client’s daughter and learned the following:
- The interest rate was 25 percent annually, even though the loan was only a 60-day loan.
- When 30 days went by and “Celia,” the daughter, could not make the full payment, the lender told her this, “No problem, make whatever payment you can but it has to be a minimum of $100 each month.”
- The lender never mentioned that there would be a stiff penalty for not paying off the loan in 30 days. Nothing was mailed to her and no phone calls were made explaining the penalty.
- Celia only had to pay $100 for each of the following six months, but at what cost?
Finally, Celia did receive a letter after six months demanding $3,000. She went into the lender and asked what could be done because she had no way to pay five-times what she had borrowed. They said “we are sorry but here are the terms of the agreement you signed.” The agreement allowed them to double, then triple the charges and then add more charges each month she was late paying the loan. Celia was sick to her stomach. They held the title to her car and started calling the six references she had given, including her mother. The discussion went something like this, “Your daughter said she was a good credit risk. She gave you, her mother, as a reference and we called you. You told us she was a good credit risk, so we took her on as a creditor…so now why don’t you pay us back?” Now, not only was Celia in trouble but she had dragged her family and friends into an ugly process that is designed to get large sums of money out of people who have failed to “Know the Rules” of the contracts they enter into with others.
This experience caused me to check out the average interest rate paid in Utah, one of the “No Limit” interest rate states, and it’s 555 percent annually!!! For your information, Utah does not allow gambling, or para-mutual betting because its legislators have determined that this type of activity does harm to communities and families, yet it somehow allows out-of-control pay-day loan stores to operate unchecked. These lending companies have grown fast and been allowed to market and grow their clientele until now there are more of these lending locations in Salt Lake County than all McDonald’s, Wendy’s, Burger Kings and Taco Bells combined.
It is clear that pay-day lending stores trap, addict, hurt and cause family anger as much as gambling. I don’t know how to quantify the harmful effects of either, but these types of institutions were allowed in the state and now Utah’s government leaders (as I’m sure other states who have unlimited pay-day loan stores) are trying to figure out how to get them out. How can anyone afford to pay 555 percent on a loan and make that work? Most recently, Salt Lake County put a moratorium on any new pay-day loan stores coming into Salt Lake City. So now these kinds of stores are popping up all around the edges of city limits in smaller communities.
Pay-day loans would not exist if someone didn’t borrow this “hard” money. If a person will learn the Money Mastery Principles and live them, it is only a matter of time before they will be on top of their finances and have no need to ever borrow money from such operatives.