“We are disappointed that we will be unable to continue serving consumers in Arizona. Our customers have consistently told us that they are highly satisfied with our services. Advance America strongly believes that a regulated, competitive and transparent financial environment benefits consumers. We believe that consumers are best served when they can choose the financial service that best suits their needs, and in many cases, that may be a cash advance. We regret that we can no longer serve the interests of many Arizonans.”
– Ken Compton, CEO, Advance America
This isn’t a good time to be in the payday lending business.
Arizona recently became the 17th state to create legislation (or in some cases, allow enabling legislation to expire) that wrecks the business model of payday lenders – businesses that offer two-week loans at annualized interest rates up to 400%. Montana, Mississippi and Colorado are also currently considering changes to their lending laws that would severely curtail the profitability of these lenders.
Right now, according to this article from McClatchy, 16 states and the District of Columbia limit the interest rates charges on short-term loans to 17% – 60%. The states are Arkansas, Arizona, Connecticut, Georgia, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oregon, Pennsylvania, Vermont and West Virginia.
Despite the CEO’s lament that his company “will be unable to continue serving consumers in Arizona”, Advance America wasn’t forced to close their 47 locations in the state – they just had to limit the interest they charged to an annualized 36%. But apparently that wouldn’t have been profitable enough for the company.
According to the company’s press release announcing the closings, for the first three months of 2010, in Arizona alone Advance America brought in just under $4 million and reported a gross profit of $1.5 million.
In response to Advance America’s press release, Arizona Attorney General Terry Goddard issued one of his own, saying “Advance America made millions in Arizona off a business model that preyed on vulnerable borrowers and charged them unconscionable interest rates and fees. They could have amended their business practices like other companies and charge lawful rates, but they chose to fold their tent here.”
Even in those states that still allow payday lenders to operate, times could soon be getting tougher. The new financial regulatory reform bill forms a Consumer Financial Protection Bureau within the Federal Reserve that will have sweeping authority to police all types of lenders and loans. In coming months that agency could make life even more difficult for payday lenders nationwide.
According to the this report from the Center for Responsible Lending, payday lenders rake in more than 4 billion dollars per year in fees from those least able to afford them: the working poor.
Proponents of payday loans claim that forcing them out of business will hurt those who need help and have no other place to turn for short-term lending solutions. They also argue that payday loans aren’t as onerous as their opponents charge – one trade association, for example, points to this list of myths versus realities about payday loans.
But whether or not these loans have a place in American society, they’re certainly becoming less popular. The Center for Responsible Lending offers this these alternatives to payday loans.
- Working out a payment plan with creditors
- Asking for an advance at work
- Finding a community-based emergency assistance program
- Getting a loan from a credit union
- Getting a cash advance from a credit card
- Turning to small consumer finance companies, where rates average between 25% and 60%
You can read about these potential solutions in more detail at this page of the Center for Responsible Lending’s website.
I've been giving financial advice for 40 years, and I'm a millionaire several times over. Here are the 10 best bits of financial advice I've both given and taken.