Payday Loans

Last week I wrote about California’s new minimum wage law that’s causing fast-food restaurants to lay off employees, limit hiring, and raise prices.  At the same time, this new law dovetails with the elimination or restriction of the once popular payday loans that further restrict the free market in ways that most adversely affect the poor.

Payday loans typically feature a low loan amount, high-interest rates, and brief repayment terms. Payday loans were designed to connect low-income borrowers to funding between paychecks quickly – the operative word being “quickly.”  These loans are unsecured and don’t require collateral.  And since payday loans are little more than financial assistance for borrowers who are between paychecks, lenders expect borrowers to repay their loans when they receive their next pay or welfare check, as the case may be.  Loan amounts are typically $100-$300 so if an individual needs more than that, he or she will probably have to look elsewhere address their needs.

Many low-income people (minorities in most cases) facing unexpected financial emergencies resort to these loans because they lack the credit worthiness to borrow from banks.  This is especially true when they need to deal with an emergency quickly.  Perhaps a car tire needs replacing, and if that’s the only means for the individual to get to work, that tire isn’t just important, it’s critical!   Or perhaps a family member is sick and needs a medication more effective than Aspirin and the individual simply doesn’t have the cash.  But irrespective of the reason, a borrower needs money they don’t have, and they need it fast; and paying $45.00 to borrow $300 until the end of the month is/was one of the very few legal options available to low-income people.

Paying $45 for a $300 loan works out to an annual interest rate of several hundred percent, something the social justice advocates consider an abomination and exploitation of the poor.  Yet these same people think nothing of shelling out $300/night for a hotel room, which extrapolates to $100,000/ year in annual rent, which strikes me as a bit exorbitant to rent a room.   But few people are likely to rent a hotel room for a year, any more than few low-income individuals are going to incur such high borrowing costs for an extended period of time.  But regardless, the borrower should have to right to make his or her own decisions in matters of personal finance without the government injecting itself.

Based on the specious reasoning that such high borrowing costs are unfair, many states including California have made payday loans illegal or have restricted them by capping “interest rates,” forcing many payday lenders to close up shop.  This was entirely predictable.   As a result, many low-income individuals have lost access to emergency cash while many lenders and their employees lost their livelihood because social justice warriors stepped in and used the power of government to upset a transaction in the free market.

Social justice warriors fail to understand that the $45 cost of the loan is not all interest, at least as economists define interest; $45 includes the lender’s cost to process the loan, create the reserves for the inevitable bad debts, and pay common business expenses such salaries and rent.

Of course, these costs are a higher percentage of the loan because small loan amounts don’t have economies of scale.  Consider, most of the hard costs to a bank, i.e., heat, power, light, rent, payroll, etc., aren’t much different whether the bank is making a $300 or a $3,000 loan.  So, the actual interest rate net of other costs of a payday loan is far from the usurious level social justice warriors contend are being charged.  But that makes no difference to the virtue-signaling warriors who want to ‘protect’ low-income individuals.

The net result is that the crusaders go away feeling good about themselves while depriving low-income people of one of the very few options available to them when dealing with a financial emergency, not to mention the lost business to the lenders who used to earn their living making those loans.  So, who benefited and who was hurt?

The biggest problem with social justice in all its forms is that it’s quick with the easy answers when the easy answers aren’t always the best answers.  The $100- $300 payday loan has value to the borrower and may have been worth much more than the $15- $45 cost if it meant not losing a day’s pay or even their job for lack of a usable tire, or having to watch your child suffer because you couldn’t afford a medication.  The thought that never seems to occur to social justice advocates is that ordinary people have far more knowledge about their own circumstances and their own ability to make decisions than a do-gooder politicians do in Washington D.C. who create these ridiculous laws.

Quote of the day: “Give me four years to teach the children and the seed I have sown will never be uprooted.”—Vladimir Lenin