More Payday Lending Falsehoods
Tuesday, August 19th, 2008The debate about payday lending has been notable for the anti-lending forces as well as those in the press (am I being redundant?) fail to grasp basic facts about the payday loan industry. I have documented that repeatedly on this blog. It seems that I have more work to do, however, based on today’s editorial in the Dayton Daily News. Let me just comment on a few of the more egregious departures from reality the editors make:
There are alternatives to payday lenders. Credit unions, for instance, and even some banks will make short-term loans for much more reasonable rates.
Really? Then why do people choose payday lenders who, in the view of these editors, rip them off? Are these consumers idiots? Well, no, since the notion that credit unions or banks are going to be making high-risk, unsecured loans at low rates to a large number of people is ridiculous. It isn’t happening now and it won’t happen when the ban goes into effect. The fact is that these high rates are necessary to provide the product that borrowers want and need.
After Sept. 1, short-term loans simply would be capped at 28 percent on an annualized basis, versus the 391 percent that can be charged now. Borrowers would pay $18 for a two-week $300 loan, not $45.
No. A 28% APR on a two-week, $300 loan is $3.23. Would you loan money to someone for that low of a rate? Would you make a profit if you did?
But when lawmakers looked into the payday businesses’ practices, they found that many customers were being encouraged to take out loan after loan because high fees were trapping them in debt.
That sounds like lawmakers actually did a study of the issue and discovered the borrowing patterns of those who take these loans. That didn’t happen. They heard from a handful of people who needed a payday loan at the time but, in retrospect, didn’t like the price they paid. But these borrowers agreed to pay the price at that time, indicating that the viewed it then as a fair price. Furthermore, there was no evidence that people were being encouraged to take out more than one loan. The plural of anecdote isn’t data. (more…)

In anticipation of the Fourth of July, Steven Chapman at Reason magazine has an 

