Payday Lending Foes Misunderstand Economics
Wednesday, January 23rd, 2008 By Marc KilmerYesterday the Ohio House held a hearing on a bill to cap the interest rate payday lenders can charge. As one Representative pointed out, this cap is really an effort to ban payday lending. This ban is being proposed in the name of payday lending customers. Apparently they are too dumb to know that the product they use is bad for them, so the government needs to save them from themselves. But Fox 8 in Cleveland actually talked to a few customers and they seem fine with the loans:
Payday lending customers talked with Fox 8 and said they keep more of their dignity by using a short-term payday loan than if they had to ask friends or family for emergency financial support.“I like to stand on my own, I don’t want to owe anyone, that’s tough,” said payday lending customer Rebecca Sotto.
Customer James Potts says he has no family to ask for help, “I would be in trouble if the payday lenders weren’t here. I have no one I can rely on.”
Do these folks sound like they need protection from their own ignorance?
Those opposed to loans think that something else will emerge to meet the needs of payday borrowers if these loans are banned:
Industry critic, Suzanne Gravette Acker says new lower interest products for smaller short-term loans will emerge in Ohio if the payday lenders are pushed off the stage. Acker has no trouble with sending the payday lenders packing, “if they can’t offer a product that doesn’t trap 300,000 Ohioans in debt then they should go away,” she said.
What Ms. Acker fails to realize is that there is nothing stopping “smaller short-term loans” from emerging right now. As the growth of the payday loan industry illustrates, there is a market for short-term loans. And if the industry really is reaping extraordinary profits (as anti-loan advocates claim) and customers are getting such a bad deal from payday lenders, then it seems some smart businessman would certainly enter the market to offer a product that offers better deals to borrowers. The fact that this hasn’t happened should indicate that customers like payday loans and/or that the interest and fees charged for these loans are necessary to cover the cost of providing them. The experience of North Carolina and Georgia after banning payday lending (where the economic welfare of borrowers got worse) illustrates that Ms. Acker doesn’t know what she’s talking about.
But if I’m wrong, then why aren’t people like Ms. Acker out there opening businesses offering these “smaller short-term loans”? If they are truly concerned about borrowers it seems their time and money would be better spent providing them with alternatives rather than lobbying legislators. After all, they seem very certain that they know this market and its customers very well. They think that lenders can serve customers with much lower fees and still remain profitable. If that is truly the case, then anti-loan advocates need to get into the business of offering these low-term loans. If they are correct, it seems certain that borrowers would flock to them, right? I’d love for these advocates to actually put their theory to work in the market. It’s really the only way to see if they are as smart as they think they are.
Tags: Regulation
