A Virginian-Pilot editorial quotes a recent study by the Center for Responsible Lending in support of a proposal to cap payday loans at annualized interest rates of 36 percent. That study takes on the argument of the payday industry that the vast majority of payday loans are used only for emergencies. That fact is, states the study, many borrowers are caught in an indebtedness trap.
- Over 60 percent of loans go to borrowers with 12 or more transactions per year
- 24 percent of loans go to borrowers with 21 or more transactions per year
- One of every seven Colorado borrowers have been in payday debt every day of the past six months
- Nearly 90 percent of repeat payday loans are made shortly after a previous loan was paid off
I find those numbers totally plausible. Millions of Americans live from paycheck to paycheck. All it takes is one big unexpected bill — a medical emergency, a car repair — and their credit cards get tapped out. There’s nowhere else to turn. And once you fall behind, it’s darn hard to ever catch up.
What I’m not comfortable with is the idea that legislation can protect people from their financial folly or misfortune. I don’t pretend to be an expert in this field, but it stands to reason that small, short-term loans are very expensive to make. Moreover, people who need payday lends tend not to be the best credit risks. If the General Assembly caps lending rates in Virginia, payday lenders may find it very difficult to make a profit and, I would hypothesize, curtail their lending significantly — if they don’t shut down operations in Virginia entirely.
In the absence of payday lenders, where would people go for short-term loans? Presumably, their credit cards are already maxxed out, or they wouldn’t be patronizing payday lenders in the first place. One thing they do, as pointed out in “Payday Lending, Do-Goodism and Unintended Consequences,” is bounce checks. Each bounced check carries a $30 fee.
How does that $30 charge compare to payday loan charges? Are the advocates of interest rate caps willing to cap bounced-check fees as well?
Another option is for borrowers to stop payments on their cars, furniture or appliances — until they are repossessed.
Are the advocates of interest rate caps willing to curtail the circumstances in which lenders can repossess collateral on unpaid loans?
Chronic indebtedness stinks. I don’t wish it on anybody. That’s why I charge everything to my debit card. If the money’s not in the bank, I don’t spend it. But you don’t solve the problem by restricting lenders. You solve it by changing peoples’ economic behavior. Americans — yes, even poor ones — need to be more disciplined about saving money. People in societies far poorer than ours do it somehow. The Chinese, whose incomes average about one twentieth the level of the United States, manage to save so much money that they can afford to lend us tens of billions of dollars every year.
The poor and the chronically indebted would be a lot better off if the Do Gooders preached economy and thrift rather than meddle in markets.
