The Issues Surrounding Issue 5

By Dr. Tom Lehman and Marc Kilmer, posted October 27, 2008

Issue 5 has provoked a lot of attention this election season. Approval of it by Ohio's voters would end the practice of payday lending in the state. Although Issue 5's passage has ramifications on the jobs of thousands and the financial decisions of many more, the debate has centered more on anecdotes than facts. Many in the media and state's political establishment seem to think that payday lending operates by different economic principles than other goods and services in the market. This misunderstanding taints the debate about this subject. It is unfortunate that this type of debate is occurring about a practice that should be no more controversial than any other type of lending.

Payday lending is a business like any other. Kroger sells groceries, Meineke sells mufflers, and payday lending stores sell short-term loans. With all these products (and any other product you can think of), the price paid by the consumer is set by supply and demand. No one is forced to buy these products and those who do so willingly part with their money to obtain the product being offered.

While you will always find someone who will complain about how much almost any product costs, in the case of short-term loans the government of Ohio has stepped in to set the price. Why? What is so different about a short-term loan?

We suspect that those opposed to them cannot really articulate why purchasing a short-term loan is different from purchasing groceries or mufflers. But people seem to think of purchasing money as somehow different from other products. It may be difficult to understand that people put a different value on money depending on when they need it, but it's true. If you need $300 today to fix your car, it has more value to you than that same $300 does in two weeks. You may be willing to pay more than $300 to obtain that $300 now.

The fast growth of payday lending stores in Ohio illustrates that people have a desire for these short-term loans and that they are willing to pay the price to obtain them. If the price was as outrageous as those opposed to payday lending portray, then no one would take a loan. People who take these loans clearly feel that the trade-off they make to obtain the loan is worth it.

Those who support Issue 5 say that these loans will still be available if Issue 5 passes, they will just cost less. Considering the fact that in other states where similar rate caps were imposed these short-term loans dried up, that claim seems disingenuous. If Issue 5 passes, it will mean the end of these loans in Ohio.

You may be glad of this. You may think that it's fine if these products are no longer offered. Those who use them, however, do so for a reason. Getting rid of these loan products won't get rid of the underlying economic problems that cause people to patronize payday lenders.

In a free market, different products and services evolve to serve the needs of different people. Each person makes his preference known by what he buys. Clearly payday lending is something that is serving a need for some people. Those supporting Issue 5 think that these people should not be free to express their preference and should be forcibly stopped from taking such loans. If two people voluntarily agree that the price of a loan is reasonable, is it really the state's job to step in and stop them from making a deal? That is the question voters should ask themselves when considering Issue 5. 

Dr. Tom Lehman is a Buckeye Institute adjunct scholar and an associate professor of economics at Indiana Wesleyan University. He has extensively researched the payday loan industry. Marc Kilmer is a Buckeye Institute policy analyst and author of several studies focusing on economic freedom.