Once again, politicians who insist they’re looking out for the economically disadvantaged threaten to do those very people more harm than good:
Payday lenders are the target of new legislation that would cap the fees they charge low-income customers for short-term loans.
The Protecting Consumers from Unreasonable Credit Rates Act would restrict interest rates to no more than 36 percent in a move that would also affect companies that offer consumers other types of credit products. The bill was introduced Thursday by Democrats in the House and Senate. [Emph. added]
Good golly. This misbegotten and clunkily named “Protecting Consumers from Unreasonable Credit Rates Act” would, were it ever enacted, be a death sentence for the payday lending industry as it’s currently constituted. There’s a reason why payday lenders charge those purportedly sky-high interest rates that people complain about: that’s the only way the business can make money. If it were otherwise, new lower-cost competitors would have entered the market long ago to crush the higher-priced incumbents. That’s the way free enterprise works–yet somehow those hypothetical new low-cost providers haven’t appeared. If a payday lender were forced to charge a maximum annual interest rate of 36% as the PCFUCRA (did I get that right?) contemplates, the lender will be out of business in no time.
Good riddance, you say. Payday lenders unfairly gouge and exploit consumers. Really? The unfortunate fact is that a lot of people in this country really do live from paycheck to paycheck. Should they ever find themselves short of cash before that next paycheck arrives, the consequences they face can sometimes be disastrous. An individual might need to get his car repaired so he can keep getting himself to work. A utility bill might need to be paid to keep the lights on. Critics object to what payday lenders charge to tide these people over. But they’re mostly hyperventilating. Rather, here’s how a real-world transaction might work. Say a borrower agrees to pay $120 in two weeks in return for a payday loan of $100 today. The do-gooders will howl about the transaction’s APR of 533%. But it’s not a one-year loan. It’s a two-week loan. And the cost of it to the borrower is all of . . . 20 bucks. That seems a reasonable price to pay considering the alternative. Individuals tend to understand their own economic self-interest pretty well, after all—and certainly a lot better than a meddling federal government does.
As to whether payday lenders unduly gouge their customers in making loans, Cash America, one of the few payday lenders that are publicly traded, earned just over 13% on its equity last year. If that’s customer-gouging, they’re doing it wrong.
Consumer advocates constantly beat the drum for ever more regulation of consumer lenders. But why stop there? Shouldn’t low-end consumers also be protected from occasionally going to nicer restaurants? Or buying cars above a certain price point?
Besides, the immutable economic fact of the matter is that the more credit creation is regulated, the less credit is available, and at a higher price. That’s not helping consumers. It’s doing the opposite.
What do you think? Let me know!