How do 'payday money' stores fund their 'buy now, pay later' loans?
Payday loan companies basically are banks (although they are incredibly terrible ones). Banks make money in two ways:  (1) They charge fees for services they provide (bank account fees, etc.); and (2) The interest rate differential: They borrow money from individuals and corporations (your savings account is essentially money you are loaning to the bank) for a small % paid to individuals, and then lend that money back to other people for a higher %. ie: You might earn 0.5% on your savings account, but then the bank takes that money and lends it to your neighbor for 2.5% as part of their mortgage. Payday loan companies make money in one way: They charge an enormous markup on money lent out to other people. The rates in some cases are so high (annualized interest rates of >1000% are not uncommon in countries without full regulation of this industry), that it barely matters where they get money from. They might get money from investors [who bought shares in the company, giving the company initial cash in the hope that they give dividends down the road], they might get money from other 'real' banks [who lend money just like they would lend money to any other business, with a regular interest rate], or they might have many from many other sources. They might even issue their debt publically, so that individuals could buy bonds from the company and receive a small amount of interest every year. The point is that the rates of return on the money leant by payday loan companies are so high, that the cost of where the money comes from is not terribly relevant.
Of course its possible. Under what terms and with what fees depends on your bank/country regulations, but generally speaking - loaning is the major source of income for banks, especially short-term account overdrafts (which is essentially a loan, usually at a high rate). In the US you can (now, since the new regulations kicked in) instruct the bank not to pay checks/decline debit card purchases if you don't have sufficient funds on the account. Otherwise you can instruct them to pay (at their discretion) to avoid bouncing checks, and accept NSF fees (usually pretty high). Some banks provide overdraft lines of credit (then you won't have NSF fees, and will just pay interest when tapping into that line), others provide option to automatically withdraw the missing amount from a linked account (checking or credit card). Basically isn't this like if they loaned a bank 400b with 401b due tomorrow, and then the bank took the same loan the next day? Gross exaggeration I know, but I just want to make sure that is the way this works. Car dealers as well as boat dealers, RV dealers, maybe farm vehicle dealers and other asset types make deals with banks and finance companies to they can make loans to buyers. They may be paying the interest to the finance companies so they can offer a 0% loan to the retail customer for all or part of the loan term.  Neither the finance company nor the dealer wants to make such loans to people who are likely to default. Such customers will not be offered this kind of financing. But remember too that these loans are secured by the asset - the car - which is also insured. But the dealer or the finance company holds that asset as collateral that they can seize to repay the loan. So the finance company gets paid off and the dealer keeps the profit he made selling the car. So these loans are designed to ensure the dealer nor the finance company looses much. These are called asset finance loans because there is always an asset (the car) to use as collateral. "When is the best time to pay? At the end of each year? If you save $1,000 each month at 1% so as to pay $12,000 at EOY on a 4.75% loan, you've lost ""4.75% - 1% = 3.75%"" over that year.  (And that's presuming you put the money in a ""high yield"" online savings account.) Thus, the best time to pay is as soon as you have the money. EDIT: This all assumes that you have an emergency fund (more than the bare minimum $1K), zero other debt with a higher rate than 4.75% and that you are getting the full company match from 401(k)." There is a strange puzzle today where savings account interest rates are not rising in-line with the Federal Funds rate. Either customers are apathetic to their alternative uses of cash, or banks have some-how formed a cartel to keep their cost of funding low. I'm leaning towards the former since bank customers today likely value readily accessible cash more than the interest rate they could earn by investing in money market mutual funds. "It's worth pointing out that most ""cash"" deals are actually debt financed, at least in part. A quick review of the 8K tells us they plan on debt financing the entire transaction with some senior notes and not use any of the 15B on their BS. This is fairly typical these days because debt is cheaper then the foregone interest on cash." "Most folks would loan out money for the purpose of being re-loaned.  Depositing money in the bank, is loaning the bank money who will re-loan it.  Buying bond based mutual funds is another way that it could be viewed that people are loaning money for the purpose of the money being re-loaned.  The reason why banks always have money available for withdrawal, is because of the reserve.  Fractional reserve banking in its simplest explanation, is that banks are allowed to take deposits and loan them out so long as they keep a set reserve.  If the reserve rate is 10% (it's really much lower), and somebody deposits $100, then the bank is allowed to loan out $90, keeping $10 as a reserve.  Now even with a reserve, a bank does run some risk of the deposits being withdrawn faster than the loans are paid back, this is called a run.  What protects banks most from this, is that deposits, withdrawals, loans, and loan repayments, all happen at a fairly steady and predictable rate (short term), so banks are able to judge how many loans they should give out.  Even when banks do see their reserve depleting, they have options.  The first and most common, is simply getting a loan from another bank.  The rule with the reserve, is that banks need to meet it at the end of the day, so banks will loan each other money overnight for the purpose of making up for the slight fluctuations that occur in a normal business day.  If you have ever heard the Fed talking about the ""overnight rate"" they are talking about the rate banks loan each other money for the night.  Another common way for banks to make up for a deficit in deposits, in a longer term solution,is to sell assets.  Fairly rare for a bank to sell actual physical assets, but the loans they hold are assets, and they can sell them to other banks.  Most banks will also hold some bonds that are available to sell.  The major functions that allow a bank to be profitable would still apply to the OP's idea.  The only real difference would be that commercial banks have direct access to the central banks, and the OP's idea would need to have a commercial bank to act as the middle man between the central bank." "Actually in Finland on some bank + debit/credit card + online retailer combinations you type in your card details as you normally do, but after clicking ""Buy"" you get directed to your own bank's website which asks you to authenticate yourself with online banking credentials. It also displays the amount of money and to which account it is being paid to. After authentication you get directed back to the retailer's website. Cannot say why banks in US haven't implemented this." "(Disclosure - PeerStreet was at FinCon, a financial blogger conference I attended last month. I had the chance to briefly meet a couple people from this company. Also, I recognize a number of the names of their financial backers. This doesn't guarantee anything, of course, except the people behind the scenes are no slackers.) The same way Prosper and Lending Club have created a market for personal loans, this is a company that offers real estate loans.  The ""too good to be true"" aspect is what I'll try to address. I've disclosed in other answers that I have my Real Estate license. Earlier this year, I sold a house that was financed with a ""Hard Money"" loan. Not a bank, but a group of investors. They charged the buyer 10%. Let me state - I represented the seller, and when I found out the terms of the loan, it would have been a breach of my own moral and legal responsibility to her to do anything to kill the deal. I felt sick for days after that sale.  There are many people with little credit history who are hard workers and have saved their 20% down. For PeerStreet, 25%. The same way there's a business, local to my area, that offered a 10% loan, PeerStreet is doing something similar but in a 'crowd sourced' way. It seems to me that since they show the duration as only 6-24 months, the buyer typically manages to refinance during that time. I'm guessing that these may be people who are selling their house, but have bad timing, i.e. they need to first close on the sale to qualify to buy the new home. Or simply need the time to get their regular loan approved.  (As a final side note - I recalled the 10% story in a social setting, and more than one person responded they'd have been happy to invest their money at 6%. I could have saved the buyer 4% and gotten someone else nearly 6% more than they get on their cash.)" They also tranche their loans just like the bonds in the housing crisis, which freaked me the fuck out when I heard it. Asked one of the main Sofi guys presenting at an event (think he works with the 4 founders about his answer and he basically just said the quality of the loans going in will keep them save. It seemed like a semi complete answer, one that I would never know unless I got an inside look at how rigid their loan process is and if it holds up when they are having a low month of inflows. "A lot of credit card companies these days uses what they call ""daily interest"" where they charge the interest rate for the number of days till you pay off what you spent. This allows them to make more money than the ""period billing"".  The idea of credit, theoretically, is that there isn't really a day when you can borrow without paying interest - in theory" The short term loan that accept any credit score is really merchant cash advance. They call it loan because clients do have options to pay as direct deposit but most of the times they would make clients switch to their credit card terminals so they can get percentage of daily sales as payment as well as percentage from their partner credit card company. And that kind of payment (percentage of daily credit card sales) is merchant cash advance. "Now store the money in -- okay here, think about a realistic worst case scenario.  Not zombie attack or meteor mega-strike, but the kinds  in which you are not entirely helpless: job loss stacked on top of the worst recession since the Great Depression, along with credit drying up so you can't just borrow your way through the hard times.   Store the money in an account and investment which is  relatively liquid, meaning you could extract cash value from it fairly easily in a worst case scneario.  Safe -- essentially impossible to lose significant value in a worst case scenario.  (or, you only count the part of its value that's sure to be there in a worst case.) If you're much too cool for an emergency fund, then sorry to waste your valuable time!    For the rest of us, it's a planning tool.   Even dot-coms do this: it's called a ""burn-rate"" and they know exactly how many more weeks their VC can fund operations.    Of course in practicality, it may not go to X months of routine expenses. Most of it may get burned up in month 2 on a new transmission.  You can't really predict this stuff, the ""X month"" paradigm is just an arm-wave.   For the financially uneducated, it's also a training tool.   In the US, school does not provide financial education.  Most people get financial habits from their parents, and like most family lessons, they are deeply emotionally wired, even if they are unconscious of that fact.  For instance, some people don't ask for the salaries they deserve, and spend lavishly until the checkbook is zero - they literally push money away.  Suffice it to say, it's a challenge to get some people to even realize that savings is a thing, when they have never in their whole lives been able to hold onto more than $20 for more than a week. The concept of an emergency fund is a sellable way to break through that ""I can't save"" mental-block. So I can see where you might think the emergency fund is greasy kidstuff.   Fair.  But it's not just that, it's also a very practical planning tool." Banks can't simply make loans in the void. This is how the cash flow works, generally:  1. Depositers *add* cash into the bank. The Bank now has cash. 10% of that cash is held on *reserve* per law. This cash is held on the balance sheet as an *asset* (cash) *and a liability* (demand deposits).   2. Someone requests a loan. The loan is funded from the non-reserved cash of these deposits. This results in a lessening of an asset (cash), and the creation of a new asset (loan).  3. Traditionally, as the debtor pays back the loan, the interest is distributed in some sort of split between the bank and the depositors. This means cash in from the loan and interest, and a liability (deposits) also go up.  4. Alternatively, while the above still happens, the bank can *securitize* the loan and sell that to investors. Investors then get access to the loan and its income, and the bank collects a fee. However, this means more cash on hand for the bank to originate additional loans without going near the reserve requirement.   If a bank extends too many loans and its reserve is threatened, it must borrow either from the fed or from other banks. These loans must be paid back. So this method makes sense and is reasonable and possible.  The money multiplier effect ends up capped by the fact that the bank can only lend a percent of its 'cash'.    My issue understanding this is I've been told that banks actually don't hold 10% of the cash and lend the other 90% but instead hold the full 100% in cash and lend 900%.  Is this accurate?  The issue I see with it is that it becomes exponential growth that is uncapped.  If the bank lends 900%, it has created this money from nothing, which by itself isn't different that the bank loaning 90% and keeping 10%.  The issue comes because the next bank who gets that money deposited will treat that amount as cash as well, so they loan 900% of the 900%.  And so on and so forth.  How does the system prevent this from happening?