Payday loans move upscale as stores open in better neighborhoods

Payday loan shops are one business that no one wants to see move into the neighborhood. While the businesses defend themselves as simply trying to help people in need, politicians and consumers in general feel differently. The stores have a reputation for locating themselves in blue collar neighborhoods, alongside liquor stores and pawn shops. And they have been accused, rightly or wrongly, of preying upon those who can least afford their services - the poor and enlisted military personnel.

It would make sense that these business would be located in these neighborhoods, however. Anyone with a decent job, a good paycheck and a credit card or two would know that borrowing money from a payday loan store, with interest rates of up to 500% per year, just isn’t a smart thing to do. And with credit cards available, loans can be had for one twentieth of the price.

The industry is thriving. And yet, like any industry, the short-term lending industry is always seeking new ways to make money, along with ways to do business with fewer risks. And the answer for this industry may have turned up in an unlikely place - more affluent neighborhoods.

The poor generate a lot of revenue for these stores, particularly in that they tend to renew loans, rather than pay them off. A loan of two weeks’ duration can be paid in full can be “rolled over” for another two weeks by paying a fee. It is this process that turns a $200 loan into an $800 debt rather quickly as that interest rate of 1% per day continues to pile up. That’s the upside of doing business in poor neighborhoods. The downside is that while the profits are good, the default rates are high. A lot of people who borrow money eventually fail to repay it. Initiating collection procedures takes time and money and may not ever result in collecting the loan amount in full. These unpaid debts run into the millions of dollars per year. And that is why the industry is seeking the greener pastures of nicer neighborhoods.

In suburbs of Denver, some of which have median incomes of $75,000 or more, short-term lending stores are moving in. One wouldn’t logically think that people earning such incomes would need to borrow sums of $500 or less (the state limit), but in fact, they do. Customers from all walks of life occasionally find themselves just a “bit short” and end up in a payday loan shop. As studies show that Americans are becoming more delinquent in paying their credit card bills, these businesses should continue to thrive. The business model is the same, although, to match the surroundings, the stores are a bit nicer. The terms are the same, however, with a fee in the neighborhood of $20 per $100 borrowed, due in two weeks.

With such stores appearing in neighborhoods all over America, both rich and poor, people will soon become accustomed to seeing them everywhere. One thing remains the same, however - it’s a really expensive way to borrow money.

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