A Market Alternative to Regulating Payday Lenders

by James A. Bacon

As Chesterfield County continues to debate how extensively to restrict payday lending — a classic manifestation of the do-gooders’ proclivity for imposing their exquisite sensibilities upon the population through government coercion — it is nice to be reminded of a positive experiment to help Virginians with short-term lending needs.

Under former Governor (now U.S. Senator-elect) Tim Kaine, Virginia state government set up the Virginia State Employee Loan Program (VSELP) in partnership with the Virginia Credit Union. Originally intended as a pilot program, VSELP proved so popular that the state has made it permanent. Writes Heather Kerrigan for Governing magazine.

Under VSELP, employees can borrow between $100 and $500 in increments of $100 without a credit check and without reporting to the credit bureaus. Employees can take out up to two loans each year, but can only have one out at a time. The loans must be paid back over six months, with payments coming straight out of employees’ paychecks and into the credit union.

The short-term loans offer a relatively low interest rate, about 25% annualized, compared to rates as high as 584% for some payday loans. The state has issued  nearly 8,400 loans since the program began — more than than $9 million in all.

Grafted onto an existing credit union, the program is inexpensive to administer. Only one full-time worker is required to run it. Admittedly, the state has one big advantage that payday lenders do not — the ability to recapture repayments straight out of employees’ paychecks, which eliminates the risk of default.

Bacon’s bottom line: Kudos to the commonwealth for developing a plan that serves the emergency financial needs of its employees. That is the preferable way to deal with the scourge of payday loans — innovation and competition. By providing a superior product, the commonwealth increases, not restricts, the array of consumer choices.

Instead of trying to regulate payday lenders out of existence  the goo-goos should stifle their authoritarian impulses and seek ways to provide a better emergency-loan service at a lower price. They can look to VSELP as a model.

6 Responses to A Market Alternative to Regulating Payday Lenders

  1. I guess I’m surprised that employees of the state would be payday lending customers to start with…..

    But I much like the idea of Credit Unions.

    The “free market” has predators. The Govt is having trouble right now with returning soldiers getting fleeced of their GI benefits.

    http://www.huffingtonpost.com/huff-wires/20120627/us-veterans-colleges/

    so I guess the “do gooding” is OK for soldiers but not ordinary folks?

    or would you also advocate that the govt should not be “protecting” soldiers either?

  2. Sounds like a good and reasonable solution to a problem that needed one.

  3. I’m thinking about this. We have people who are vulnerable to others who would take advantage of them.

    this is across the board no matter your income level or demographics.

    People have gotten screwed out of their GI benefits, their homes, signed car loans that had outrageous conditions, or bought cars that had known “lemon” issues, paint with lead in it, food with poisons in it, etc, etc, etc.

    Why is payday lending different?

    The only think I can see here is that we say that one segment of society does not deserve equivalent protections that the rest of see on – say – credit card terms or tires that don’t meet DOT standards.

    I’m not justifying more and more regulation – just acknowledging what we have – and that we seem to have a double-standard when it comes to consumer protection.

    It’s okay to make sure the car company does not sell you a Lexus Lemon but it’s not okay to make sure a payday lender doesn’t do what credit card companies were doing a few years back.

    It comes across sounding like a selective advocacy against safeguards for SOME kinds of people who use SOME kinds of services that the rest don’t use – but the services they use – ARE protected.

    • Larry, you are missing the essential point. I don’t know anyone who thinks of payday lending as anything but a last resort. But people wouldn’t use those services if there were better alternatives. By regulating payday lenders out of existence. the goo-ggos deprive people of choices. Far better it is to foster innovation and competition that creates new and better choices for people needing emergency loans.

  4. Jim – there are things that are illegal that would be services of last resort if they were not.

    right?

    I’m just trying to understand why services for the poor are deemed less in need of regulating that services for folks who are not poor.

    why do we protect soldiers with GI bill benefits but nor the poor from predatory businesses?

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