The truth about payday lending

You will make very few friends defending the payday lending industry, the modern day loan sharks whose short-term cash loans to working people can have interest rates that soar into the triple-digits on an annualized basis.

Except they're not really interest rates. The loans are short-term -- generally about two weeks -- and if you were to extrapolate the amount paid for the loan to 52-weeks, yeah the interest rate is high. But you can't hold the loan for that long.

Payday lenders are the target of a lot of consumer groups, who charge that these lenders prey on low-income workers. Virginia is the site of the latest showdown between the industry and its critics, with one minister describing it as a "David vs. Goliath" battle in an Associated Press piece.

But it's really more like David vs. David. The fact is that payday lending just isn't that profitable of a business. Don't believe me? Take a look at the margins for some of the publicly traded payday lenders -- they're actually lower than some credit unions!

That's not to say that payday lending is good. It's actually a terrible deal for the consumer, and something that should be avoided. The problem is that the short-term loans have high costs for everyone involved: high default rates, high overhead for the lender, and that all requires a high "interest rate" if you want to call it that. If payday lending were so profitable, wouldn't someone else come in and do it for a little bit less money and make a fortune?