Do gooders across Virginia are fulminating against the evils of payday lenders for “targeting” the poor, charging unconscionable fees and perpetuating the cycle of poverty. In January, the General Assembly considered 16 bills that would have imposed restrictions. Although none of them have passed, the agitation continues against the industry, which generates $1.3 billion a year of business in Virginia alone.
It’s hard not to sympathise with poor people caught in a cycle of debt. And the charges on the micro loans are undeniably high: In Virginia, reports the Harrisonburg Daily News Record, lenders can charge $15 for every $100 they lend. Calculated as an annual rate, the interest comes to 391 percent, although the loans almost never roll over for a full year. Critics are lobbying for a 36 percent annual cap — a rate that payday lenders say would put them out of business.
Frankly, I’m amazed that payday lenders charge only $15 per $100. There are two reasons why the rate seems justified. First, there are paperwork and other administrative costs associated with each loan, regardless of the size of the loan. Secondly, the loans are going to a high-risk group. Although 95 percent of borrowers pay back their loans on time, or nearly on time, that means 5 percent don’t. That’s a high delinquency rate — higher, I believe, than the delinquencies in the infamous sub-prime mortgage market that is roiling the world of global finance.
Finally, I would observe, if the terms of payday lenders are so onerous, why do so many people patronize them? Because a large number of people have a need for emergency cash, and there’s nowhere else to get it… except from Cousin Vinnie and Uncle Guido, who will charge you even more, and they’ll break your kneecaps if you don’t pay on time.
If the Go Gooders think that payday lenders are so rapacious, there’s always one remedy available in a capitalist system. Go into business yourself and lend the money at rates and terms your conscience allows. If your instincts are right, you’ll find lots of customers and be successful. If you’re wrong… you’ll go out of business.
