Industry critics continuously insist that the payday industry relies on rollovers for profitability and that they create a cycle of debt for the consumer.
Both of the allegations are false, but are employed to play on emotions not logic or facts. The reality is that consumers accessing emergency funds through a payday advance understand the costs involved for the transaction as well as the term and anticipate only using the advance for a limited time, otherwise they would be shopping for a longer term solution (longer term loan, negotiating with creditors, adjusting their budgets, etc,...). Payday advance companies depend on the trust of their customers and only a few simple requirements to obtain a quick solution for an emergency situation.
Critics allege the payday industry makes exorbitant amounts of money due to rollovers (and encourage the consumer to "rollover"), and that even if the consumer fails to pay back, the payday company makes money.
The first reality is that most states do not allow "rollovers". CFSA member companies agree to limit rollovers to four in states that do not regulate rollovers. Most states require the account to be paid in full before a new transaction can be initiated.
The second reality is that a payday company's profit is not $15 per transaction.
They have expenses to pay, just like any other business (of which a large part is locally-employed salaries and other locally spent expenses).
The industry average profit of five publicly-traded payday companies is 6.6% of revenues. Assuming a $15 fee for a $100 advanced, this means that the payday companies average a profit of .99 cents per transaction (in comparison, the average payday company pays $4 in salaries and almost $8 in local expenses - over half the money collected in fees stays in the community).
Based on the .99 cents of profit per $15 transaction, if the consumer failed to pay back the $100 loan after the initial 14 day period, the payday company would lose $99.01. If it were even possible, the consumer would have to roll the account over 102 times before the payday company would recoup its initial loan amount, if the consumer failed to pay it back. In other words, on the 102nd transaction, the payday company would earn its first $1 of income (.99 X 102)-$100 = $1, if the consumer failed to pay back the advance.
Also, if the consumer comes in, pays off and renews the transaction 102 times, the payday company would have advanced them $10,200. The math: 102 advances at $100 each = $10,200. In other words, it would take 1,428 days or 3 years 11 months for the payday company to make a .99 profit, provided the consumer does not default during the period. This scenario is not possible for either the consumer or the payday company
