War on the Poor Update: the Attack on Payday Lending

by James A. Bacon

Once again the war drums are pounding as do-gooders unleash a wave of publicity against payday lending. A local case in point is a guest column in the Virginian-Pilot under the name of Debra Grant, who told her personal story. This is how it started:

I had a relative who needed to borrow $150, so I took out a payday loan to help. Every month, I would have to roll the loan over until the next month, for a $37 fee.

Any person of limited means who extends so much help to her relatives deserves kudos for her caring and generosity, and nothing I say here is meant to disparage Ms. Grant personally. But I have to question her logic.

Drawing upon her personal experience and her association with Virginia Organizing and the Virginia Poverty Law Center, Grant advocates two things: (1) support for the Bank On program, which teaches financial responsibility and runs a matched savings incentive program, and (2) support for a Consumer Financial Protection Bureau initiative to institute new underwriting rules that would reduce payday lending. The first expands options available to poor people, and is to be lauded. The second narrows the options available to the poor, and should be condemned.

Let’s parse what happened to Grant. She took out a payday loan on behalf of a relative. No one held a gun to her head and made her take out the loan. She could have availed herself of any number of available alternatives.

Er, she did have alternatives, didn’t she? What are you telling me — she didn’t? She couldn’t take out a bank loan? Perhaps that has something to do with the fact that over-regulated banks operating in a near-zero interest rate environment can’t make money on small personal loans and have largely gotten out of the business. How about credit cards? Grant doesn’t tell us, but it seems likely that she either didn’t have any credit cards or had maxed out her credit.

How about taking out a car title loan? Grant’s relatives did take out a car loan, and look what happened — they missed a payment and had the car repossessed. That didn’t turn out so well.

The fact is, there are no attractive borrowing alternatives for poor people (and people with bad credit). That dismal reality reflects the country’s super low interest rate environment, the high cost of government regulation, the high cost of administering small uncollateralized loans, and the high risk of default by people with poor credit. Rather than address the underlying causes, do-gooders respond by blaming one of the few groups willing to extend credit to the poor by excoriating them and removing one of the few options, as bad as it is, available to the poor.

According to Grant, research by the Pew Charitable Trust shows that if payday loans weren’t available, 81% of borrowers would cut expenses. Insofar as cutting expenses is possible for poor people, that sounds like something they should do whether they have access to payday lenders or not!

Grant also cites the work of the Matched Savings Incentive Program, in which consumers deposit money in a savings account and community-funded grants match the deposit to double the savings. “This helps create a cushion for low-income people to use instead of payday loans in an emergency,” she writes. “Instead of trying to pay off-high interest loans, Bank On customers can save money and even earn a little interest of their own.”

Ah, teaching personal thrift and responsibility. What a great idea. Instead of spending time and energy shutting down payday lenders, maybe consumer advocates should focus less on putting payday lenders out of business by regulatory fiat and more on out-competing them by providing better terms and superior service. That’s a revolutionary idea!