Tim Miller of Center for Consumer Freedom has a very sensible opinion piece today in the Christian Science Monitor. From the piece:
One consequence of payday lending restrictions is that they force would-be borrowers into alternatives that are far more costly. Georgia, for example, has outlawed the practice – mistakenly, as a Federal Reserve Bank of New York study indicates.
The study found that bounced-check fees grew by $36 million and Chapter 7 bankruptcy filings rose by almost 9 percent in Georgia after payday lending was banned. What’s worse: Bouncing checks and wrecking your credit rating, or paying a lender $15 for a $100 advance on your paycheck?
Given these facts, it’s clear that those guilty of exploitation are not the short-term lenders, but politicians who are trotting out the poor to score a political victory.
The whole piece is well worth the read.
1 response so far ↓
1 Jon Schultz // May 5, 2008 at 3:49 pm
The nub of the problem is usury laws. Usury laws are an anti-freedom tradition based on religion, not science, and should be abolished just as the tradition of slavery was abolished. There is no legitimate reason why a doctor or lawyer should be allowed to set his own price, but a lender should not be. Either we have a system where merchants, service providers and consumers have inalienable rights, where basic freedoms are guaranteed, or we have one where anything can be prohibited for any kind of dubious reason.
Usury originally meant the sin of charging any interest whatsoever on a loan. Today, not wanting to give up their bank interest and capital gains, moralists define it as charging “excessive” interest on loans and feel that they are the ones who are qualified to define what is excessive and what isn’t.
In fact, the APR of a payday loan tells you nothing about how profitable the loan is for the lender, because it ignores his cost in making the loan, or how wise the transaction is for the consumer, because it ignores his other alternatives. The APR is a statistical tool which only has value for comparing loans which a consumer has access to; if all other factors are the same, his wisest choice is the one with the lowest APR. But most payday loan borrowers do not have access to any other type of credit, so comparing payday loans to personal loans or home loans is completely irrelevant. And prohibiting short-term, small-dollar loans because you translate the fee into an APR which you then claim is “outrageous,” based on an irrelevant comparison, is itself an outrageous distortion of reality and restriction of what should be an inalienable right for both lenders and consumers.
There’s a place for government regulation in the field of loans, to prohibit deceptive advertising, to ensure that consumers understand the terms of loan offerings, and in the area of debt collection where we have the Fair Debt Collection Act. But the idea that an APR can be designated as a dividing line between acceptable and overpriced loans is just dead wrong, and is based on religious concepts that simply do not accord with any scientific analysis.
Usury laws in fact create loan sharking, where unlicensed lenders use violence to collect on loans. Loan sharking only exists because usury laws prevent reasonably-regulated lending.
Let there be a free market in the field of loans and the dynamics of supply and demand will ensure that consumers have the best options available to them. End usury laws. Period.
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