QUESTION: Matt on Twitter asks how payday lenders work. Dave tells Matt they’re scum and explains the exorbitant interest rates they charge.
ANSWER: Payday lenders are scum, and they mess over their customers. The effective rate of return, were you to keep a loan out for a year, the annual percentage rate is typically around 800%. Eight hundred percent.
How do they mechanically work? You go in and you want $200. They will give you $200 cash, and you will write them a check—a hot check—that is postdated for $225. For two weeks, you are paying $25 interest on $200. If you did that for a year, it would be an 11% rate of return, but when you do it for two weeks and then you don’t pay it off in two weeks and go do another one for the next two weeks, then you do another one for the next two weeks, then go do another one for the next two weeks, every time you do this and you keep it up, it’s an 800% annualized return. An 800% annualized return.
There are two primary reasons, in our culture—in North America—why people are poor. Reason number one is greedy jerks take advantage of people and keep them poor. That’s what the Bible would call oppressing the poor. That’s what payday lenders do. That’s what your government does with the lottery, because almost all of the lottery tickets are bought in lower income ZIP codes, so the poor are being oppressed. By the way, they’re financing the college educations of upper- and middle-class people’s kids. Poor neighborhoods. That makes no sense. That’s oppression of the poor. That’s why the lottery is morally wrong. It’s not the gambling aspect. There’s no gambling to it. You just lost your money. In gambling, you at least have a chance of winning. You’re not going to win the lottery.
The second reason that people are poorer—and I’ve been poor a time or two when someone took advantage of me in my naiveté or my stupidity or my ignorance or they just flat out lied to me—and when those kinds of things happen, then the victim becomes poorer. The other reason—the primary reason that people become poor is stupid decisions. I’ve done a bunch of stupid decisions. If I just had half the money I’ve lost due to stupid decisions … wow. I can’t even think how much … how many small countries that would take on.
How do payday lenders work? They’re taking advantage of people and primarily poor people. Why? You don’t see those things operating in the rich end of town. They operate in the poor end of town. Why? Because that’s where people make stupid decisions, which sets you up to be oppressed and to be a victim. I’ve been a victim of all of that myself, so I’m not picking on anyone saying anything I haven’t done.
The oppression of the poor and the stupid decisions of the poor are what make us have poor people in North America, primarily. It’s not that they don’t have opportunity. They’ve got opportunity. I know because I’ve been poor. I started with nothing. I wasn’t poor; I was middle class, but I started with nothing. We got married and didn’t have a dime. I don’t know why you wouldn’t call that poor. We just didn’t think of ourselves as poor. Mike Todd says, “I’ve never been poor. I’ve only been broke. Poor is a state of mind.” It’s a way of looking at things. And then we went completely broke and bankrupt. I don’t know what you’d call that except poor. I really wasn’t poor. I was just broke. So I started twice from nothing because I’m dumb enough I had to do it twice, so I know opportunity is out there.
“Well, you didn’t grow up in that mindset.” No, but you could grow up like one of my team members did. I had a team member years and years ago who was a rock star sales guy. He grew up in the projects. He grew up in subsidized housing. His mom was a single mom, and she didn’t have a way to pay for shelter. She took an apartment in subsidized housing. Rough area. He grew up in that setting. He did not have the money to go to college, but he knew he needed a college education if he really wanted to get ahead. So what’d he do? He joined the Army. He really was not a fan of the Army, I’ll tell you that. He was a fan of the military in the sense of respect and that kind of thing, but as far as a career track, he didn’t like it. He was too much of a go-getter to sit and wait on other people to make decisions. That was a quote from him. So when he got out of the Army, what’d he do? Well, they paid for his college, and he went through four years of college—paid for. By then, he’s 26 or 28 years old. He got out of high school, went four years in the military, and then four years to college. That’s eight years out of high school. He was selling vitamins in a vitamin store—number-one sales guy—and I hired him. He made $100,000 working for us. There’s opportunity. By the way, everybody he knew, including most of his family, told him he’d never amount to anything, but he just decided—he just made a decision to do something different. You get to make decisions. You’re allowed to.