Entrepreneurship & Small Business

What do you think of this business idea?

  • Last Updated:
  • Aug 11th, 2014 3:59 pm
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[OP]
Banned
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May 3, 2009
6148 posts
774 upvotes

What do you think of this business idea?

Open a payday advance shop, lend to people at 60% interest with collateral of the same value as the principal and is postponed to us.
Advantages: High Interest Income/ROI, Low default risk given collateral

Then, package and securitize, and sell it to investors.

What do you think?
11 replies
Member
Sep 28, 2012
349 posts
290 upvotes
Vancouver
TheRed wrote:
Aug 9th, 2014 11:14 pm
Open a payday advance shop, lend to people at 60% interest with collateral of the same value as the principal and is postponed to us.
Advantages: High Interest Income/ROI, Low default risk given collateral

Then, package and securitize, and sell it to investors.

What do you think?
In other words, a pawn shop where you make more money off interest than off giving less for the pawned item. You are a Genius!
Deal Addict
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Mar 23, 2008
3859 posts
330 upvotes
Toronto
You cannot charge predatory rates like that, the Government regulates payday loan businesses in order to protect the consumer. There is a limit on how much you can charge them.



Next idea please.......
[OP]
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May 3, 2009
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NEMESIS_2008 wrote:
Aug 9th, 2014 11:54 pm
You cannot charge predatory rates like that, the Government regulates payday loan businesses in order to protect the consumer. There is a limit on how much you can charge them.



Next idea please.......
Govt law is 60% APR for payday shops, thats why I set it as such
[OP]
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May 3, 2009
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Smokeybear wrote:
Aug 9th, 2014 11:25 pm
In other words, a pawn shop where you make more money off interest than off giving less for the pawned item. You are a Genius!
Totally different concept. This is like subprime debt obligations v2, only that its not regulated Chartered Banks.
Sr. Member
Jul 10, 2005
754 posts
121 upvotes
Toronto
So you want to charge the maximum allowed by law, to people that are in such dire straits that can't negotiate?

No thanks, I prefer to sleep at night.

I prefer my customers wealthy and happy to buy my products.
Deal Addict
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Mar 23, 2008
3859 posts
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TheRed wrote:
Aug 10th, 2014 12:17 am
Govt law is 60% APR for payday shops, thats why I set it as such
Ok, I credit you on your accuracy, but there is more than meets the eye in terms of pay day loans. You're targeting a demographic who is generally poor and lives pay cheque to pay cheque. There are ethical morals when opening a business. Making a living off of the poor will make me lose sleep at night. Secondly, you are assuming that none will default in the loan. I would bet that there would be some ratio of defaults which will eat into your profits and the pain of hiring collection agencies to collect that money is just too much. Anyways, due to ethical and moral issues, it's your call. Get licensed, and open your doors.
Deal Addict
Mar 16, 2006
2257 posts
723 upvotes
If they had equal value collateral, they would not use you and pay you 60% interest.
Sr. Member
Apr 30, 2013
582 posts
277 upvotes
King City
NEMESIS_2008 wrote:
Aug 10th, 2014 12:10 pm
Ok, I credit you on your accuracy, but there is more than meets the eye in terms of pay day loans. You're targeting a demographic who is generally poor and lives pay cheque to pay cheque. There are ethical morals when opening a business. Making a living off of the poor will make me lose sleep at night. Secondly, you are assuming that none will default in the loan. I would bet that there would be some ratio of defaults which will eat into your profits and the pain of hiring collection agencies to collect that money is just too much. Anyways, due to ethical and moral issues, it's your call. Get licensed, and open your doors.
This.
Member
Aug 8, 2005
474 posts
117 upvotes
Toronto
joongpark wrote:
Aug 10th, 2014 4:25 pm
If they had equal value collateral, they would not use you and pay you 60% interest.
I disagree.

If I had a $5000 car that I needed to get to work, and worked a minimum wage job and was absolutely stuck for money (think bailing a sibling out of jail, etc) I would consider it.

If you were going to lend me $5000 cash to get him/her out of jail, and I could pay you back in a month (at an outrageous cost of $3000 for your services) I think people might consider it.

Maybe my brother/sister said if I bail him out for $5k he'll repay me $8k. Maybe I could work overtime for the next month and make up the money. Maybe I could sell that flat screen TV I just bought to raise some of the money to pay you back, but it might take a few weeks and I don't have the cash right now. Maybe my income tax refund is coming in a week.

Lots of possibilities. If I need that car to get to/from work, I'd probably do it. If I sell the car (my other option) then I can't support myself because I can't get to work!
Newbie
May 28, 2013
68 posts
10 upvotes
Toronto
TheRed wrote:
Aug 9th, 2014 11:14 pm
Open a payday advance shop, lend to people at 60% interest with collateral of the same value as the principal and is postponed to us.
Advantages: High Interest Income/ROI, Low default risk given collateral

Then, package and securitize, and sell it to investors.

What do you think?
Not much point to a pay day loan company that operates on the needs of a quick turn around when one has to take the time to prove the value of a securing asset. Looking at BHA1's example of a car, how many people are going to have their car sufficiently valued when they realize, with little warning, they need some cash immediately?

Are you going to have properly trained appraisers on-site to do this job? Will they provide guarantees of accuracy? Whether you do or not, you're going to need some hefty insurance against lawsuits if someone defaults, you go to collect the security, and it turns out the appraisal was off and skewed in your favour. Part of the "package" you'll need to sell to investors is the massive liability risk involved.

Adding securities to a loan is a more complicated process than many people realize, especially if you want to actually be perceived and function as a commercial loans company and not, as Smokeybear put it, a pawn shop.
Penalty Box
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Apr 21, 2004
49329 posts
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I do agree that I don't want to take advantage of other's misfortune, like most pawnshops and payday stores do.

How easy is it to garnish salaries and wages?

60% is not outrageous as that is 5%/month, especially to those on the borderline and can pay the amount back rather quickly.

Problem with collateral value is that the payday store or pawnshop will more likely put a much lower value as they'd want to profit from reselling these stuff if the debtor is not able to pay. I have seen several pawnshops operating on ebay as sellers. This again to the detriment of the borrower.


I doubt the debt can be securitized and sold because many of these borrowers will have poor credit scores and no investor will touch these securities. These are worst that junk bonds for sure and the business operator would have the collateral on hand but the investors are left with a piece of paper with no backing.


This is a good segway to a P2P lending business where collateral is put up even with good credit scores but then didn't the government disallow P2P lending except for accredited investors?

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