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Friday, March 27, 2015

Payday Loans and Predatory Politicians

Banning payday loans hurts the worst off

Progressive politicians have found a ripe old target for populist demagoguing: payday lenders.

In a speech on Thursday afternoon, President Obama endorsed new proposed rules from the Consumer Financial Protection Bureau to crack down on the payday lending industry. These short-term, high-interest lenders have also recently drawn fire from comedians like Sarah Silverman and HBO’s John Oliver.

Payday lenders make for an easy punching bag. Moneylenders have always been a popular target, and laws against usury are as old as sin. These lenders serve a primarily poor clientele, usually people with very poor credit who represent a high risk for defaulting on the loan.  And the types of short-term, emergency loans they offer carry double- to triple-digit (annualized) interest rates.  

Loan sharks taking advantage of people in dire straits — what’s not to hate? But, rhetorical red meat notwithstanding, some people find themselves in situations where they need short-term, emergency cash — and are willing to pay for it.

Populist politicians argue that they’re trying to “protect” poor people from “predatory” lenders. But what they’re really doing is taking away the last recourse — from the already severely limited options — for poor people in urgent financial need.

Before seeking to regulate payday lenders into submission — or oblivion — it’s important to ask: what’s the alternative?

As high as the interest rates of these loans can be, compare them to the compounding cost of bank overdraft fees.  The average fee is about $30 per overdraft transaction.  The cost of those overdraft transactions can add up pretty quickly, all while plunging that person’s bank account balance further into the red.  

It won’t take long at all for the cost of the bank fees to eclipse even the cost of a 30-day loan at a supposedly outrageous 400% APR (which comes out to just a little bit more than 1% interest for each day of the loan).   

Of course it would be better if people never needed a loan like this, and if everyone had the credit necessary to get a loan at a more reasonable rate of interest. But, for some people, it’s a far better option to have the short-term cash they need and pay the interest cost than it is to pay hundreds of dollars in fees to the bank while still not having any money for life’s needs.

The president, like most politicians, says he wants to help the poor.  I don’t doubt that he does.  But taking options away from the least well-off people, who already have the fewest options available to them, is hardly compassionate or helpful.

Banning payday lenders won’t abolish the realities that their customers are facing — poor credit and the inability to make ends meet — but it will make them harder to manage, removing one stop on the train to eviction, bankruptcy, or default. Banning usury may feel good, but it sure won’t do good.