Wrong About Payday Loans
Monday, January 21st, 2008 By Marc KilmerOver the weekend Paul Bellamy of the Equal Justice Foundation wrote to the editors of the Columbus Dispatch about payday lending. He was responding to a letter to the editor earlier this month that laid out some facts about payday lending. Mr. Bellamy’s response was an interesting use of rhetoric and evasion of facts to paint an inaccurate picture of payday loans:
To claim that payday’s interest rate is “5 percent per month” ignores the legal standard that has always been used to measure the cost of money: annual interest….Interest is not measured by month, but by year. The measure for the cost of money that is required by the Truth in Lending Act for all credit products is APR, annual percentage rate, and that number for payday lenders is 391 percent.
Yes, the Truth in Lending Act does say this and that is why payday loan forms all have the APR on them. But to think that the APR represents the real cost of a payday loan is ridiculous. For one, these are two-week loans, not annual loans. Borrowers are charged $15 per $100 in fees and interest. That’s a 15% interest rate on the loan. The APR is purely a theoretical number. Borrowers know this and focus on how much they actually have to pay on loans, not on an irrelevant APR number.
To suggest that a payday loan is the best short-term credit alternative to bounced checks, credit-card late fees and reconnect fees for utilities is irresponsible.
Mr. Bellamy’s true feelings about borrowers comes out here — they are irresponsible. He doesn’t say so in so many words, but since many people choose the “irresponsible” route of payday borrowing to pay avoid bounced checks, credit card late fees, and reconnect fees, it’s hard to escape the implication that Mr. Bellamy thinks these people don’t know how to handle their money. His alternative? Let the government tell you how you can spend your money.
The truth is that taking a payday loan to avoid these fees may be a good idea for some people. Credit card late fees and interest add up quickly and it seems like a pretty bad idea to let your utilities be disconnected. Personally, I am willing to admit that I don’t know if it’s a good idea or whther it’s “irresponsible” to take a payday loan for these reasons. I don’t know the financial situation of the potential borrower and I don’t think that I have some superior knowledge about his situation. I trust that potential borrower to make the best choice for his situation.
Mr. Bellamy, on the other hand, seems to think he’s smarter and more responsible than the borrower. Mr. Bellamy knows that if the borrower had the freedom to make his own financial decisions he would make an irresponsible choice, so Mr. Bellamy wants to outlaw his options. I am glad that Mr. Bellamy thinks he is smart enough to run the lives of others, but I find that kind of paternalistic attitude insulting and dangerous.
Finally, the letter highlights a study from two Federal Reserve Bank of New York researchers who claim, incredibly, that payday lending somehow staves off personal bankruptcy.
As mentioned above, Mr. Bellamy seems to have a very high estimation of his financial knowledge. I guess it is incredible to him that staff economists from the Federal Reserve who have made a detailed study of this issue disagree with him.
If payday loans stave off bankruptcy, then why did the U.S. Department of Defense bar payday lenders from making loans to armed-services personnel?
Because they, like some Ohio legislators, want to ban these loans based on little more than their appearance. Personally, I’d take the financial knowledge of staff economists for the Federal Reserve over that of the average Senator or Representative.
But do we really need a “study” to figure out that carrying more high-interest debt will cause more money to go toward interest payments and less money toward food, clothing and shelter?
How does increasing usurious debt loads help prevent bankruptcy? It’s a fundamentally absurd proposition.
It’s an absurd proposition to Mr. Bellamy because he doesn’t understand the nature of payday loans. These loans do not create “usurious debt loads” nor a “cycle of debt.” People who have financial problems use payday loans. These loans do not cause their financial problems. These loans, as the evidence indicates, actually provide a better alternative for these people than other options. If you take away payday loans you do not help people, you just force them to turn to less attractive alternatives.
A fundamental misunderstanding of economics coupled with a paternalistic attitude is a dangerous thing. Unfortunately, by the strong support for a ban on payday lending in Ohio, this combination is pretty common.
Tags: Regulation
