The Solution to Chronic Indebtedness: Personal Thrift, Not Credit Controls

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.

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14 responses to “The Solution to Chronic Indebtedness: Personal Thrift, Not Credit Controls”

  1. Anonymous Avatar

    This is fairly amusing. When it comes to land use, environmental regulation, energy production and consumption, highway construction, etc. this blog is the home of the do-gooder nanny state “we know what’s best for you” crowd. Would that you had this same “live and let live” attitude for people who want to build tract houses and six lane highways! But ripping off poor stupid people, now that’s just another expression of economic liberty!

    This is organized and sanctioned theft. The people going in the door of these places are on the edge of bankruptcy, and they come out having added to their debt, not reduced it. Now I actually see the argument for limited government and letting people ruin their lives if they wish, but unless you are willing to recognize Dominion’s plans to build more power plants as just another expression of economic liberty, then can it.

    I have seen some economists from the Federal Reserve cited in support of this industry. I would ask if those same folks felt that the subprime mortgage market was also serving a valuable purpose. Betcha they did.

    Your first thought will be that these bankrupt debtors paying the kid’s milk money in interest to these robbers is not really a broad social problem (whereas air pollution is). But I disagree. Eventually the cost does get shared around. We may not be our brother’s keeper, but we pay plenty of his bills.

  2. Free Market with a Conscience Avatar
    Free Market with a Conscience

    One solution might be to make any consumer debt where the interest rate exceeds 20% unenforceable in a court of law. (Pick whatever number.)

    Why should our legal system become the enforcer for debt slavery?

    Certainly the Judeo-Christian tradition has held for thousands of years that usury when lending to the poor is a despicable form of theft.

    Are payday lenders paying their fair share of collection costs, or are they freeloaders on an existing judicial debt enforcement system?

    Has anyone looked at the absurd rates of interest on credit cards when you add in over limit fees and late fees?

    $39 for being one day late on a $15 payment is 949% interest on an annual basis.

  3. Anonymous Avatar

    I agree, but if it is unenforceable in a court of law, then we are back to enforcement by Guido.

    If you want to make criminals, just make laws people can’t live with.

    “Are payday lenders paying their fair share of collection costs, or are they freeloaders on an existing judicial debt enforcement system?”

    I think that is a fair question. At the same time you have to ask if their costs would be lower (including hiring Guido) if they didn’t have to use the existing debt enforcement system.

    If you say that interest rates in excess of 20% (or whatever) are unenforceable does that have the same end effect as Bacon suggests? If the loans are not available people will have to learn personal thrift.

    However, we need to understand that when you are truly in a trap, thrift is no longer the issue.

  4. Jim Bacon Avatar

    Anonymous 10:56: Give me a “solution” to chronic indebtedness that doesn’t penalize poor people in some other (usually less transparent) way.

    As far as I can tell, interest caps and similar remedies are all about making the Do Gooders feel good about themselves, not actually doing anything for the poor. If you take away the payday loan option, does the borrower’s debt obligation miraculously disappear? No. The borrower is forced to resort to some alternative that’s even less palatable than payday lenders — at the cost of greater anxiety, stress and suffering.

    But that malign consequence is invisible to the Do Gooders, who have gone off to “help” someone else.

  5. Just be clear, Jim — you’re opposed to all usury laws and public regulations of financial contracts? Any legally-binding contract that names any financial burden, no matter how onerous, should be enforceable by our courts?

  6. Anonymous Avatar

    I haven’t made up my mind on this issue, as both sides have presented credible arguments. However, I find it somewhat ironic that a recent article in Forbes magazine on microlending discusses a microloan to a small Mexican livestock operator at 40% interest. The article suggests that those who lend on such terms are quite socially conscious.

    I’m not ready to conclude that 40% interest is reasonable in Virginia, but I’m troubled by the argument that 40% can be both enlightened and evil at the same time. Perhaps, the truth is somewhere in the middle.


  7. Jim Bacon Avatar

    Waldo, I canot say if I’m opposed to all usury laws and consumer lending regulation or not. I don’t know banking law, and there may well be legitimate reasons for regulating the industry. As a generality, I would look favorably upon laws/regulations that prevent or punish deception and fraud. In that vein, I also would favor full disclosure and transparency in lending terms.

    But I will affirm that I am highly suspicious of consumer-lending regulations, which often have insidious and unanticipated side effects — most often constricting credit to poor/working class people. If you clamp down on what payday lenders can charge, payday lenders will restrict who they lend to. Poor people will have to find alternative sources of credit, some of which may well be more onerous. It’s that simple.

    TMT, the “reasonableness” or “fairness” of an interest rate is entirely context specific. It depends upon the supply of credit, the demand for credit, the credit-worthiness of the borrowers, the availability of collateral, the strength of the currency, the inflation rate and and no doubt other factors.

  8. Anonymous Avatar

    Ya’ll need to argue these concepts with the Nobel foundation.

    Yes, THAT Nobel foundation….

  9. Free Market with a Conscience Avatar
    Free Market with a Conscience

    Micro-credit is a great idea.

    Here is another one: Micro-savings accounts.

    Have you looked at passbook savings rates lately? Banks are paying small savers (poor people) only 1/4 of 1% per annum.

    Even with minimal inflation, poor people who save are going backwards.

    By law, some of the highest paying investments are only available to high net worth certified investors.

    Yes, the government protects poor people from earning a better rate of return on their savings.

  10. Anonymous Avatar


    A return of 40% seems high absent a significant risk. But maybe the solution is less regulation and not more.

    As I recall, many of the savings banks started out as associations founded by immigrant groups. An obvious solution would seem to be micro-banks or credit unions. But banks and credit unions are all heavily regulated.

    Is there room in the economy for very lightly regulated, non-insured micro-banks run and funded by local communities, neighborhoods or ethnic groups? These “institutions” would need to stay small or become regulated like any other financial institution. The issue is: whether society and politicians are willing to to accept some risk that these loans go bad, institutions fail, in order to provide favorable financing to under-served markets?


  11. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    “Is there room in the economy for very lightly regulated, non-insured micro-banks run and funded by local communities, neighborhoods or ethnic groups?”

    This is one of the reasons the government gave when they freed up credit for homes. Minority areas did not have equal access to funding for mortgages and other loans. Most of the operations were small and undercapitalized, while big banks were engaging in financial redlining. The environment that helped create subprime mortgages also facilitated payday loans. Now some wish for the government to intervene in an issue of government’s own making.

  12. Darrell -- Chesapeake Avatar
    Darrell — Chesapeake

    That should have been written:

    Minority, rural and other low income areas did not have equal access to funding for mortgages and other loans.

  13. Anonymous Avatar

    Personal thrift doesn’t mean squat when there isn’t enough to get to the end of the month.

    When you are trading rent, for groceries, groceries for medicine, medicine for clothes, and clothes for transportation, what you have is a trap.

    Payday lending is the bait.

    The idea that such people have meaningful alternatives, simply shows a lack of imagination or experience.

  14. Jim Bacon Avatar
    Jim Bacon

    Anonymous 8:43. Poverty is a trap. But curtailing payday lending doesn’t get people out of the trap. If people need money and they can’t find a payday lender, what alternatives do they have? That is the point that all the anti-payday people consistently ignore. Please, tell me, if someone desperately needs money and he/she can’t go to a payday lender, what superior options do they have?

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