Salary Advance United Ponders Its Future

Max is the CEO of Salary Advance United, a payday lender with twenty-five locations. The core business of Salary Advance is to lend consumers advances of between $100 and $500 against their paycheck for short periods of time, usually about one week to ten days. Salary Advance also offers other financial services such as check cashing and wiring money. Similar to other payday lenders, Salary Advance charges approximately $15 for a two-week loan to their borrowers who tend to be high risk. If the loan interest were calculated on an annual basis, the rate would be 390 percent. Some states, including New York, cap interest rates at 16 percent for loans, even though store credit cards often charge over 20 percent for their loans. (Both 16 and 20 refer to annual rates.)

Max informs his management team during a meeting quite that he, along with them, is worried about the future of the business. He notes that fifteen states have already banned payday loans, and that more and more politicians are condemning the business. He reminds the team that some of the accusations against the industry are preposterous.

"My favorite example is that renting a full-size sedan for a day cost about $75 before taxes," said Max. "If somebody rented the car for the entire year, or 365 days, the annual fee would be $27,375 plus taxes. Yet no politician complains about the exorbitant rates charged by car-rental agencies. My biggest concern right now is that the state is going to shut us down."

Max then had a problem-solving session with the group, exploring alternatives that could be pursued to stay in business. One alternative that emerged was to set up online operations overseas in a country that welcomed such businesses (e.g., Malta or the West Indies). The suggestion was to still keep a few offices open to catch street traffic and offer services for wiring money. In this way, state regulations could be avoided.

Another alternative that the group formulated was to base the business on a Native American reservation, again to avoid state regulations.A handful of payday lenders have successfully made this transition.

Max concluded the meeting by saying, "We cannot forget that our mission is to help financially troubled people in need. Without our loans, many of our potential customers would have their cars repossessed or their homes foreclosed. Equally bad, they would have to use loan sharks to get money. Our interest rates may seem high to the outside world, but we have to charge enough to cover our risks and earn a small profit."

The team nodded in agreement with Max.

Questions

1. What is your evaluation of the ethics of Salary Advance United making payday loans?
2. What do you think of the ethics of the two alternatives mentioned to avoid state regulations: locating offshore or on a Native American reservation?
3. What do you recommend to Max to make the business model of Salary Advance ethical enough to avoid being attacked by politicians?

Please answer each question separately with the detail explanation.