Is this a great country or what? While Congress dithered last year over whether credit card companies should be required to keep their annual percentage rates below 25%, there were companies already out there quietly raking in a typical 391% APR on the short-term loans they made. Legally.
Shocking, isn't it? What's even more shocking is that I'm about to tell you how you can get in on that action ...
Rocky Balboa wouldn't be knee-capping anybody if he collected debts for Cash America International (NYSE: CSH ) , the payday loan company that is part of what some see as a predatory (albeit legal) short-term lending industry. He'd just be rolling the debt over and over, collecting the $15 fee on a $100 loan every two weeks by automatically debiting it from the borrower's bank account.
But short-term lending accounts for only 38% of Cash America's total revenue in 2010. Where else is its money coming from?
Some cash for your trash
Let's say you need money real quick. No, don't go snatch a purse or anything. Just take your fake Rolex to the nearest Cash America Pawn and try to convince the clerk it's genuine. If that doesn't work, you may end up pawning your beloved saxophone, taking away only a fraction of its worth, intending to reclaim the horn later. Loan fees and service charges from such pawning transactions contributed another 19.6% to the company's 2010 revenue.
But hold on a second, there's a catch: When you try to reclaim your sax, it may not be there anymore. If you are late to return to redeem it, the shop will likely sell it as it does with all pawned objects that have overstayed their welcome. This is called "merchandise disposition," and accounted for 41.4% of the company's total revenue last year.
But that only adds up to 99%. The last bit comes from the company's check-cashing operation and the other financial services it offers at its lending and pawn stores, like the sale of money orders, prepaid credit cards, and money transfers.
The fine print
In general, a lame economy is blood in the water for the short-term lending industry as more and more people need immediate cash transfusions just to get by. So it would seem that Cash America and other short-term lending companies, such as EZCORP (Nasdaq: EZPW ) , Advance America (NYSE: AEA ) , and Dollar Financial (Nasdaq: DLLR ) , would be part of a growth industry. Instead, 17 states and the District of Columbia currently prohibit triple-digit interest rates, and the newly minted federal Consumer Financial Protection Bureau (CFPB) is also targeting payday lenders, although they're not allowed to cap interest rates.
Still, I don't see this industry going away. People have to put bread on the table, and the consequences of a bounced check can be even more usurious than a trip to Cashland. But investor beware: Before going in this direction, make sure there are no regulatory roadblocks waiting around the corner to knee-cap your portfolio.