Sub-Prime Lending is Not Dead

Even though sub-prime lending was one of the main contributors to the financial crisis that the United States now faces, it never actually died out after causing all of those problems, it simply took on a new form.

Payday Loans

Many of you have probably witnessed one or more of the payday loan commercials on television today. With the economy in the shape that it is in, and most financial institutions cracking down on the money that they lend out to people, companies like World Acceptance are taking advantage of the situation to its fullest. World Acceptance issues a high number of small payday loans to customers who are in need of money right away. They take advantage of the people who simply can’t get loans anywhere else and they are able to charge ridiculous interest rates to these individuals who will happily pay the money back to them in many cases. The company usually hands out loans that are less than $4,000 and the loans are to be paid back in less than three years in most cases.

Exceptional Growth

Plenty of investors probably wish that they would have put their money into banks when they were at their lowest point financially because of the financial crisis. From that point until now most banks have experienced impressive growth levels. One of the most dramatic examples of this was World Acceptance. Bank of America experienced an impressive 50% gain in their stocks over that period of time, and JPMorgan was able to get even more impressive numbers of 135%, but those gains don’t hold a candle to the 327% gains that World Acceptance has experienced. Anyone who invested a significant amount of their money into the company is probably thrilled that they had the courage to do so.

A High Risk

Since the company is essentially handing out money to people who weren’t able to pay back loans in the past they are taking a pretty high risk on the money they are lending out. Fortunately for the company, since they are charging such high interest rates, it doesn’t matter if a large number of the borrowers default on the loans. Even though they are losing money on those customers, they are still gaining enough from the honest, paying customers to turn a nice profit. It’s no surprise that they are able to withstand a high number of deadbeats when the company is charging its customers nearly a 400% interest rate on the loans that it is giving out. This high level of interest rates doesn’t seem very ethical, but it is certainly doing wonders for their bottom line.

Cracking down on Payday Lenders

Richard Cordray the director of Consumer Financial Protection Bureau is focusing on regulating payday lenders much more than they currently are. Most payday lenders were hoping that Barack Obama was not going to be reelected because they would be able to get rid of the organization once and for all and continue on their path of massive profits. The CFPB is moving ahead toward new legislation and a new set of regulations that will keep consumers from being burned by ridiculously high interest rates that companies like World Acceptance are issuing.