BuckeyeBlog

In his column on Sunday in the Cleveland Plain Dealer, Thomas Suddes takes yet another swipe at payday lenders. In doing so he once again illustrates he is unacquainted with the basic facts about how businesses operate. For instance, he trots out the old myth that payday lenders are “obscenely profitable.” To support that claim, he discusses the gross profits of one payday lending company. Sorry, Mr. Suddes, but gross profits don’t mean too much. They are the profits that accrue to a company before deducting a variety of operating expenses. So these gross profits may look large, but once you subtract things like salaries and overhead, payday lenders usually make a profit margin of around 3% to 8%.

This kind of shoddy reporting about payday lending is, unfortunately, par for the course. You have those opposed to payday lending say things that sound bad, such as payday lenders charge 391% APR or they have huge gross profits. While technically true, these things are not really accurate in the sense that they leave a misleading impression. A 391% annual percentage rate is meaningless when you are discussing a two-week loan. Gross profits are a meaningless indicator of how big a company’s profit margin really is. But those who say this either don’t know what they are talking about or are happy to leave such a misleading impression in the average reader’s mind. It’s too bad we can’t have a little more honesty in the debate over Issue 5.

These issues and others are discussed in an issue brief I co-authored with Dr. Tom Lehman.

Tags: issue 5, payday lending, Regulation

This entry was posted on Monday, November 3rd, 2008 at 2:21 pm and is filed under Economic Freedom. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.