Unwise to Curb Payday Lending
Thursday, January 3rd, 2008 By Marc KilmerIn another editorial, the Cleveland Plain Dealer contends that “a wise state law” should curb payday lending. It contends that “rather than getting [borrowers] out of financial trouble, the loans get many of them in even deeper.” In 1776 Adam Smith, in The Wealth of Nations, wrote some wise words that would be good for the editors of the Plain Dealer to consider: “It is not the multitude of ale-houses … that occasions a general disposition to drunkenness among the common people; but that disposition arising from other causes necessarily gives employment to a multitude of ale-houses.” In short, payday loans do not cause financial problems; instead, financial problems cause people to seek payday loans.
That fact is supported by a staff report from the New York Federal Reserve looking at what happens in states where payday loans are banned:
Payday loans are widely condemned as a “predatory debt trap.” We test that claim by researching how households in Georgia and North Carolina have fared since those states banned payday loans in May 2004 and December 2005. Compared with households in all other states, households in Georgia have bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate. North Carolina households have fared about the same. This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check “protection” sold by credit unions and banks or loans from pawnshops.
Banning payday loans will do nothing to help those who are in financial trouble; ironically, it will likely make their problems worse.
Tags: Regulation
