Menu Close

If we could constrain them during that period from maxing out their available credit, they’d never need a payday loan

If we could constrain them during that period from maxing out their available credit, they’d never need a payday loan

And those loans are jaw-droppingly expensive

There is, of course, the question of what happens to people between the time when they had no debt, and the time when they need the payday loan. People who have maxed out their credit and are getting turned down for loans could probably have used an intervention that would force them to match income to outflow.

But I’m not sure how you do that. Say we slap on a usury law that makes credit card lending to poor people unprofitable, so people use personal finance loans instead. Well, the people who are getting payday loans now would, in this alternative universe, have already maxed out this line of credit. How do we know that? Because they seem to have done it in this universe. I don’t know whether that’s because they’re irresponsible, or because they had a string of really crappy bad luck. I’m not sure it matters.

The core problems we would actually need to solve to get rid of payday loans are first, that some people have marginal incomes and no capital, and second, that when credit is available, some of those people do not exercise the incredibly tight spending discipline which is required to achieve financial stability on such an income. Because their incomes are marginal, and the lives of the working poor are fraught with all sorts of extra problems, like cheap cars that break down constantly and landlords who turn the heat off, the people who do not keep very tight control of their money are fairly likely to end up in a place where they have exhausted all other credit lines, and are forced to pawn something, hock their car title, or take out a payday loan.

Even non-profit payday lenders apparently charge about a 250% APR, because the loans have a 10-20% default rate, and the transaction costs on lending small amounts are very high. Of course, the profits are usually quite substantial, with APRs often double the non-profit rate . . . and even I have to wonder how a guy who made his fortune lending money at 600% o society’s most financially unstable people, smiles at himself in the mirror every morning.

In principle, I agree that many poor people would be better off if they were able to borrow a lot less money at better rates (though even then, I payday loans Hawaii always wonder if I’m not just imposing my monetary time preference on others). Only when I look at any given rule aimed at accomplishing this, it always hurts a lot of people, even as it helps others–I think the last twelve months have proven fairly conclusively that the supply and price of credit are not entirely unrelated to default risk. While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates. And I don’t see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it.

So I think focusing on the lender side is usually a mistake, though I can’t say I’d be sorry to see caps on what payday lenders can charge. The lender side makes us indignant, because hey, they’re getting rich by charging outrageous rates to those least able to pay them! But if we want to actually improve the lives of the borrowers, we need to intervene before they get to the payday loan point, rather than try to stop them from getting one once they’re there. Felix is doing God’s work on just that problem, as are many other people in many other ways. I think we’ll be better off when payday lenders go out of business due to lack of demand, not prohibited supply.

Credit cards have low transaction costs, which is why, as Felix argues, people use them for sudden emergencies. Many of them would be better off if they did go to their credit union for a personal loan to pay off the balance.

On the other hand, if you’re planning to pay off the balance in a couple of months, that’s overkill–and the loan inquiry will ding your credit

But as Bart Wilson told me the last time I saw him, they also found a minority were made much worse off by the loans. Those were the people who took out ten or more–and just as Lawrence and Elliehausen found in the real world, those extreme borrowers made up about 20% of the group.