Inside Financial Services

Another Bad Idea From The Do-Gooder Community

In Congress, a proposal that would doom an industry that's crucial to low-income borrowers

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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!

13 Responses to “Another Bad Idea From The Do-Gooder Community”

  1. William Zimmerman

    OK, as requested, I’m “letting you know” what I think: I think you’re full of shit.

    • Greg

      Mr. Zimmerman,
      I’m interested in your rebuttal. And specifically, I’m interested in any facts & figures you can offer rather than just rhetoric if you’re going to refute what Tom said.

  2. Jim pitblado

    I completely agree with you that it will put the pay day lenders at financial risk and turn their customers over to the criminal lenders who will double the required payback

    I do not believe the bill will get thru congress if it gets a fair analysis. Could become a running point for warren however. Anything to vilify the lenders.

  3. PMM

    Tom, Great article. Perhaps the Senate and House should take up Senator
    Warren’s bill to put the USPS in the Lending business. They could fund them
    with additional tax payer money to create another boondoggle. The USPS
    could get into another business they know nothing about and piss away
    more money. GO FIGURE!!! Some this nonsense you just can’t make up.
    PMM

  4. Stays 72

    Tom,
    Once again you fail to surprise me. 36%! 533%! This is fair pricing? Fair pricing for whom? You ask “shouldn’t low end consumers also be protected from going to nicer restaurants,” as if that’s equivalent to getting your car repaired so a person can drive to work. What a completely naive and ignorant statement to make. Clearly you know nothing about the struggles of the lower economic class in this country. Your writing is predictable and simple minded, and it is shocking that an investment advisor of your standing continues to support the failed policies of the so-called “free market” politicians you bow your head to.

  5. Winthrop

    Tom, thanks for highlighting yet another bad idea. Would those behind this bill like to accept responsibility for someone losing their home to foreclosure over twenty bucks? Most people don’t like having to live from paycheck to paycheck, and the government, of course, won’t admit that many of it’s policies (e.g. Zero Interest Rate Policy: causes commodity price inflation; Patient Protection and Affordable Care Act: increases cost of heath care while reducing availability; “Green” energy policies: increases energy costs, allocates capital to alternative sources only viable via subsidies, etc.) are part of the reason saving is next to impossible.

  6. tom brown

    stay72 if you need $100 for two weeks and I am willing to lend it to you provided you promise to pay me back $120 in two weeks YOU are the one who decides to do it. Those that accept those terms are saying that is a “fair” price. Why do people like you feel you should make so many decisions for others?

  7. MacArthur

    You are confusing do gooders with worthless busybodies. The Bible never speaks against good works. The world needs do gooders. Give your head a shake… then you’ll dislodge that tic against do gooders you’ve unconsciously appropriated.

  8. swpilgrim

    kind of makes one want to bank in Canada!

  9. Stays 72

    Tom, placing boundaries is not making decisions for people. It is simply creating rules of business that are reasonable and fair. Sure, if you can convince me to accept a 533% loan, I guess that’s my fault. And If I can convince you that I’m a cardiac surgeon, then you’ll let me operate on your heart, right? Of course not. My doing your heart surgery is about as good for you as me taking a 533% loan. I’m sure there is someone out there that I could convince that I’m a great heart surgeon, but that doesn’t make it right for me to perform heart surgery.

  10. rivvir

    Usury is usury, no matter how you slice it. Why shouldn’t these people be protected from usury just as are the rest of us?

  11. Ole Holsti

    The best idea is to get the Postal Service back into banking. Low cost banking will help to drive out those payday lenders.

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