Half the payday loan stores in America are owned by independent entrepreneurs. They’ve scraped together $25,000 to open a single payday loan store. On top of that, they’ve likely taken most of their life savings and borrowed from family, friends, and a bank. They’ll use that money to fund their $8,000 monthly overhead, the loans they make, and to pay themselves just enough each week to feed their family.
Overhead covers rent, utilities, one or two employees, signage, advertising, payroll taxes, software, computers, office supplies, and a few other items.
Understand that these owners don’t just fling open their doors and start making $120,000 in loans each month. It takes almost 15 months to reach that. In other words, the store does not generate any profit during this period. The owners have gambled all they have on their business.
So if a store manages to build up to a $60,000 loan portfolio, at the end of their first year, they will break even in month 15.
But industry opponents — who have no clue how these businesses truly operate — never mention this, do they?
So let’s look at the store operator once he’s managed to break even. He will extend about $1.5 million in loans to customers each year. Let’s say he’s in a state that permits a fee of $15 per hundred borrowed.
Opponents ignore the fact that, on average, 6% of these loans will never be repaid despite collections efforts. That means $90,000 of that $1.5 million loaned is never returned. Thus, the lender will only earn money on $1.5 million of loans.
$1.5 million x 15% = $225,000 in total fees
An average store costs $8,000 a month to run. Thus, total store costs for a year will be $96,000.
$225,000 total fees – $96,000 expenses = $129,000 in store profit.
But remember, that operator had to borrow from a lot of people to fund his losses for a year in order to have money to lend out. That requires about $150,000 in total capital. Now, maybe they got lucky and got these loans before the credit crisis and are averaging a 10% APR interest rate, which costs them $15,000 in annual interest payments.
$129,000 store profit – $15,000 interest = $114,000 in net profit
Say this owner contributes $14,000 to his 401 (k) for retirement.
$114,000 net profit – $14,000 retirement = $100,000 in taxable income
Now he must pay federal and state income taxes. If this operator has a 4-person family to support, their federal and state taxes will be $16,000.
$100,000 taxable income – $16,000 = $84,000 in take home pay
In the final tally, $84,000 for a small business owner of one payday advance store is a very nice annual income, but hardly the level of wealth opponents claim that payday lenders achieve each year.
This, however, doesn’t even reflect the real truth of what happens to that money. Chances are he takes home a lot less than $84,000. He takes home just enough to provide for his family, doesn’t contribute to his retirement plan, but instead he’ll start saving it to open another store.
So next time a payday loan opponent screams over how wealthy a payday loan operator is, ask how much they think an operator makes. Then surprise him with the truth.
