Payday Loans: Leave this Industry Alone

“Bunch of do gooders shutting down the last chance these people had.”

This sentence is a rare moment of truth concerning the coming regulation (or shutdown) or the payday loan industry. It appeared in the comment box on the New York Times story. Otherwise, most comments were out for blood. Regulate them! Limit interest! Make them all suffer for their usurous ways!

But, pretty much, the commentator I quoted has it right. The effort by the Consumer Financial Protection Bureau to regulate payday lending on a national level, backed by President Obama, cannot lead to good things, either for the industry or the people it serves. It’s another case in which intellectual and financial elites who do not use or need the service will crack down and thereby hurt the very people they are claiming to help.

Let’s establish some priors. This industry is big, employing some 70,000 people. It’s been growing for decades, and now spans the country. There is probably a payday lender in your community, or maybe even dozens. It’s also very profitable because these institutions provide a service that regular banks do not provide: quick cash to those without bank accounts, credit history, or credit cards.

Who uses them? New immigrants, migrant workers, poor people, the socially marginalized, the unemployed, people faced with unexpected financial liabilities, and others with serious needs. Very often, these are people without power, influence, or connections. What the poor and marginalized sometimes do have are small assets such as cars and paychecks that can serve as collateral for loans to meet temporary cash needs.

It’s pretty odd that the same crowd that howls about the evils of payday lending meanwhile toasts the innovators of microcredit in the developing world, showering their founders and managers with prizes and foundation grants. Do these people not understand that payday lending is the U.S. version of microloans, a form of credit that operates outside regular banking? Apparently not.

Are the loans expensive? Absolutely. There are fees, such a $25 for a quick advance of $200 over a two week period. That’s often cheaper than overdrafts. And it is much cheaper than the government itself charges for late payment of tickets. Regardless, is anyone forced at the point of a gun to take them? Absolutely not. For most everyone, they are a last resort, something you do when cash on hand is absolutely necessary, right then. For whatever reason.

As with every market exchange, it is mutually beneficial because both sides win. If this were not true, this rarified loan market would not exist. The business is profitable because it provides a service that people need. Maybe that seems so ridiculously obvious that it would not need to be pointed out. And yet, it seems like the one point that is completely lost on those who believe that the industry is exploitative and evil.

What is it that the regulators propose to do? They want to limit the number of loans a person can take out in the course of some period of time. They want to limit the amount of interest that can be charged and the amount of the loan. They want to put some stop on the time in which collection for the loan can take place. They would further require more extensive credit checks to make sure that people really can pay back the loans in the future.

All of these measures would seriously compromise the functioning of these institutions and the markets they serve. Requiring more extensive credit checks would, quite simply, rule many people out for getting loans. The “do gooders” might think that is a great idea. But those denied access to fast cash would certainly have another opinion.

The limits on collection would further disincentivize making loans, as would restrictions on the interest that can be charged on loans. As for limiting the number of times the service can be used, it’s a very strange measure that only punishes the consumer who found the service beneficial in the past and desires to use it again.

Of all the measures, perhaps the one that seems most intuitively correct is that which limits the amount of interest charged. Instead of 100%, why not limit interest to 25%? That would certainly seem to lighten the load on the poor. Right? Well, perhaps, provided that credit could still be extended under those conditions.

But think about this just a bit. Let’s say that all conditions remain the same, so that there are just as many loans available to the same people, but one thing changes: the interest owed is much lower. What do you suppose the effect will be? Interest is the price of credit, so what happens to the quantity demanded at a lower price? It goes up.

In other words, the poor would actually be encouraged to borrow more rather than less under a mandatory lower interest. Regulators surely understand this given that the Fed has a zero interest policy right now precisely encourage a greater rate of borrowing. The same would be true in the payday loan industry.

Is this what we want from regulations, for new rules to encourage more borrowing, more indebtedness, more reason to avoid saving and financial responsibility? Probably not. In fact, if your concern is for the values of the poor, you should actually favor higher and not lower rates of interest. Higher interest discourages profligate borrowing. If the “do gooders” don’t want the poor constantly to avail themselves to debt-based financial management, they should be pushing for even higher rates.

All this basic economics aside, this really is a moral issue. Regulations like these cut off opportunities for the most vulnerable people. Let’s say you are living paycheck to paycheck, using your car to get to work, and suddenly you need a fix on your car that costs $500. You have no money, no credit, no family. The payday loan people can get you on your feet again, right away. Yes, you pay but that’s better than losing your job.

In the regulated world that Obama is proposing, this person is sunk, all due to government controls.

There is a social-psychological point here that I find particularly intriguing. None of the people proposing these new rules use these services. Still, they imagine themselves competent to use force to override the voluntary choices of entrepreneurs and the clients they serve. They imagine that they know more than those who are directly involved in the markets themselves, which is to say that they are elitists who wildly exaggerate their own intelligence while looking down on the mental functioning of the poor and the marginalized, while accusing the rest of us of not caring.

It’s time we realize that those who push for government regulation of markets are fundamentally dangerous to social progress.

“Bunch of do gooders shutting down the last chance these people had.”

Downvote that comment all you want, readers of The New York Times, but it is absolutely true.

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Jeffrey A. Tucker

Jeffrey A. Tucker is Founder and President of the Brownstone Institute. He is also Senior Economics Columnist for Epoch Times, author of 10 books, including Liberty or Lockdown, and thousands of articles in the scholarly and popular press. He speaks widely on topics of economics, technology, social philosophy, and culture.

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16 comments

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  • On a visit stateside some years back, I saw an advert on telly for payday loans from a Native American Indian tribe. Apparently they have cash resources they wish to deploy in this manner. Good on them.

    Elsewhere, recently, I came across an analysis of the long term discouraged workers figure, which indicates that as many as 92 million Americans not only have no work, but aren’t counted as “unemployed” because they are so discouraged they aren’t apparently looking for work. Your point about what poor people have going for them, what they can pledge as collateral to get funds they need, combined with this very large number of people without visible means of self-support, makes me think that those in power who want everything to be structured to benefit the giant banking mega-corpses are going to wake up one day and find that there is an armed revolution in the streets. But perhaps they simply believe, “It can’t happen here.”

    • Yes, one such company out of Louisiana is called Mobiloans. It operates within the boundaries of the Tunica-Biloxi Reservation. The thing is, their payment structure is actually far more reasonable than that of ACE or similar companies (for example, If I were to borrow 700 dollars from Mobiloans, I could pay the whole thing back for $770). I wonder how much of that competitive advantage comes from tribal nations not having to strictly operate in the same manner as the states do.

      I have used them on occasion when I needed some quick liquidity in my own operations in the shadow economy. Mobiloans is happy to make money from me, and I am happy to use that temporary influx of cash to make MORE money from individuals who, in turn, are happy with the instant cash I provide them. No one walks away cheated or robbed.

  • On a visit stateside some years back, I saw an advert on telly for payday loans from a Native American Indian tribe. Apparently they have cash resources they wish to deploy in this manner. Good on them.

    Elsewhere, recently, I came across an analysis of the long term discouraged workers figure, which indicates that as many as 92 million Americans not only have no work, but aren’t counted as “unemployed” because they are so discouraged they aren’t apparently looking for work. Your point about what poor people have going for them, what they can pledge as collateral to get funds they need, combined with this very large number of people without visible means of self-support, makes me think that those in power who want everything to be structured to benefit the giant banking mega-corpses are going to wake up one day and find that there is an armed revolution in the streets. But perhaps they simply believe, “It can’t happen here.”

    • Yes, one such company out of Louisiana is called Mobiloans. It operates within the boundaries of the Tunica-Biloxi Reservation. The thing is, their payment structure is actually far more reasonable than that of ACE or similar companies (for example, If I were to borrow 700 dollars from Mobiloans, I could pay the whole thing back for $770). I wonder how much of that competitive advantage comes from tribal nations not having to strictly operate in the same manner as the states do.

      I have used them on occasion when I needed some quick liquidity in my own operations in the shadow economy. Mobiloans is happy to make money from me, and I am happy to use that temporary influx of cash to make MORE money from individuals who, in turn, are happy with the instant cash I provide them. No one walks away cheated or robbed.

  • A couple of things amuse me about the vilification of the payday loan industry,
    First, ” micro lending” by non profits is viewed as an unvarnished good, so does it really ,matter who lends to the poor? Is a proliferation of capital sources, and competitive suppliers of financial services to an under served community a bad thing?
    Second, the payday loan industry is not highly profitable. The cost of originating and servicing these loans is very high, as is the default rate. The unspoken secret about this business is that it is a creature of artificially low interest rates. The payday lenders capitalize their operations with ” warehouse ” lines from larger financial services institutions that don’t have the origination or credit skills that the payday lenders have. As rates rise, or as the economy recovers, I would expect these warehouse lines to be less available, as more attractive markets consumed the capital available to the retail lenders to a very marginal community.
    And then the ” Big Thinkers” will be satisfied, the poor will have no access to credit, and government will have a new problem (of their own creation) to solve

  • A couple of things amuse me about the vilification of the payday loan industry,
    First, ” micro lending” by non profits is viewed as an unvarnished good, so does it really ,matter who lends to the poor? Is a proliferation of capital sources, and competitive suppliers of financial services to an under served community a bad thing?
    Second, the payday loan industry is not highly profitable. The cost of originating and servicing these loans is very high, as is the default rate. The unspoken secret about this business is that it is a creature of artificially low interest rates. The payday lenders capitalize their operations with ” warehouse ” lines from larger financial services institutions that don’t have the origination or credit skills that the payday lenders have. As rates rise, or as the economy recovers, I would expect these warehouse lines to be less available, as more attractive markets consumed the capital available to the retail lenders to a very marginal community.
    And then the ” Big Thinkers” will be satisfied, the poor will have no access to credit, and government will have a new problem (of their own creation) to solve

  • More on this subject:

    In states that set a limit on payday outfits they found that it HURT the customers.
    “Ohio, like most states, has a ceiling on the interest rates payday lenders can charge. But price ceilings have often “acted as magnets for prices,” says Robert DeYoung, an economist at the University of Kansas.
    DeYoung did a study on rates at payday lenders in Colorado, after the state put a rate ceiling in place. Right after the cap was created, there was a range of prices; a few years later, over 95% of the payday loans in Colorado carried the maximum interest rate.”
    Listen to the whole story: http://www.npr.org/blogs/money/2010/05/the_tuesday_podcast_payday_len.html

    “Pew’s study found nearly 40 percent of payday borrowers would have taken out a loan no matter what the terms were. ”
    http://www.marketplace.org/topics/wealth-poverty/payday-lenders-inspire-mixed-feelings-borrowers

  • More on this subject:

    In states that set a limit on payday outfits they found that it HURT the customers.
    “Ohio, like most states, has a ceiling on the interest rates payday lenders can charge. But price ceilings have often “acted as magnets for prices,” says Robert DeYoung, an economist at the University of Kansas.
    DeYoung did a study on rates at payday lenders in Colorado, after the state put a rate ceiling in place. Right after the cap was created, there was a range of prices; a few years later, over 95% of the payday loans in Colorado carried the maximum interest rate.”
    Listen to the whole story: http://www.npr.org/blogs/money/2010/05/the_tuesday_podcast_payday_len.html

    “Pew’s study found nearly 40 percent of payday borrowers would have taken out a loan no matter what the terms were. ”
    http://www.marketplace.org/topics/wealth-poverty/payday-lenders-inspire-mixed-feelings-borrowers

  • Usury is detrimental to justice and a properly functioning economy.

    Prof. Jesús Huerta de Soto, in Money, Bank Credit, and Economic Cycles p. 417, says usury (credit, inflation, etc.) contributes to unemployment:

    The direct cause of massive unemployment is labor market inflexibility. … the indirect cause is still inflation; more specifically, credit expansion initiated by the banking system without the backing of real saving. Credit expansion is ultimately what gives rise to massive unemployment, since it instigates the entire process of widespread discoordination and malinvestment

    Bishop Nicole Oresme (1320-1382) wrote, in the first monetary treatise, that inflation caused by tampering with money’s value, as in fractional reserve banking, is worse than usury:

    The usurer has lent his money to one who takes it of his own free will, and can then enjoy the use of it and relieve his own necessity with it, and what he repays in excess of the principal is determined by free contract between the parties. But a prince, by unnecessary change in the coinage, plainly takes the money of his subjects against their will, because he forbids the older money to pass current, though it is better, and anyone would prefer it to the bad; and then unnecessarily and without any possible advantage to his subjects, he will give them back worse money. . . . In so far then as he receives more money than he gives, against and beyond the natural use of money, such gain is equivalent to usury; but is worse than usury because it is less voluntary and more against the will of his subjects, incapable of profiting them, and utterly unnecessary. And since the usurer’s interest is not so excessive, or so generally injurious to the many, as this impost, levied tyrannically and fraudulently, against the interest and against the will of the whole community, I doubt whether it should not rather be termed robbery with violence or fraudulent extortion.

    (cf. my Bitcoin wiki user page )

  • Usury is detrimental to justice and a properly functioning economy.

    Prof. Jesús Huerta de Soto, in Money, Bank Credit, and Economic Cycles p. 417, says usury (credit, inflation, etc.) contributes to unemployment:

    The direct cause of massive unemployment is labor market inflexibility. … the indirect cause is still inflation; more specifically, credit expansion initiated by the banking system without the backing of real saving. Credit expansion is ultimately what gives rise to massive unemployment, since it instigates the entire process of widespread discoordination and malinvestment

    Bishop Nicole Oresme (1320-1382) wrote, in the first monetary treatise, that inflation caused by tampering with money’s value, as in fractional reserve banking, is worse than usury:

    The usurer has lent his money to one who takes it of his own free will, and can then enjoy the use of it and relieve his own necessity with it, and what he repays in excess of the principal is determined by free contract between the parties. But a prince, by unnecessary change in the coinage, plainly takes the money of his subjects against their will, because he forbids the older money to pass current, though it is better, and anyone would prefer it to the bad; and then unnecessarily and without any possible advantage to his subjects, he will give them back worse money. . . . In so far then as he receives more money than he gives, against and beyond the natural use of money, such gain is equivalent to usury; but is worse than usury because it is less voluntary and more against the will of his subjects, incapable of profiting them, and utterly unnecessary. And since the usurer’s interest is not so excessive, or so generally injurious to the many, as this impost, levied tyrannically and fraudulently, against the interest and against the will of the whole community, I doubt whether it should not rather be termed robbery with violence or fraudulent extortion.

    (cf. my Bitcoin wiki user page )

  • @geremia
    usury ( what is usury?) and credit expansion should not be confused. Access to credit at market rates is not something a capital seeker need avail themselves of, government sponsored credit expansion is both extortion and fraud.

  • @geremia
    usury ( what is usury?) and credit expansion should not be confused. Access to credit at market rates is not something a capital seeker need avail themselves of, government sponsored credit expansion is both extortion and fraud.

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