Posted on 03/30/2004 8:56:03 AM PST by CSM
WASHINGTON - Ever ready to find a crisis requiring expanded government authority, a score of states have passed legislation targeting "predatory lending." That is, politicians decide what is and is not fair when it comes to borrowing money.
Often people of modest means need short-term loans and are willing to pay high interest rates to get them. At tax time, for instance, many people get loans from banks and even tax preparers in advance of receiving their income tax refunds from the Internal Revenue Service. The interest rates are high, but as many as 10 percent of Americans seek such loans.
While advance tax return loans are concentrated in the spring, advance payday loans are an everyday occurrence. People get small loans, typically for a few hundred dollars, while providing a post-dated personal check for repayment. Over the last 25 years, such lending has burgeoned from $10 billion to $25 billion annually.
Payday loans have vociferous critics, however. For instance, the so-called Center for Responsible Lending calls them a "debt trap." The Consumer Federation of America and even the National Association for the Advancement of Colored People are campaigning against the industry.
Payday lenders already are regulated by 33 states. There are restrictions on interest rates, fees, number of allowed rollovers, maximum advance, and maximum term.
Nevertheless, a couple dozen states are considering new legislation. In several of them the proposals would effectively kill payday lending.
Naturally, advocates advance such bills as a means to protect consumers. Earlier this year, for instance, Michigan Gov. Jennifer Granholm vetoed legislation establishing licensing and disclosure requirements because she thought the interest ceiling of 13.25 percent was too high. (The current national average is 17 percent.)
In fact, payday lending restrictions often are advanced by competing interest groups. For instance, Georgia's legislature voted to ban advance payday loans. But high-interest, short-term loans aren't likely to disappear; rather, they will become a monopoly business of banks.
Payday loans obviously would be a bad way to finance long-term debt, such as home mortgages. When mishandled, borrowers can dig themselves into a hole.
However, virtually everything in life, if mishandled, can create a problem. Obviously payday loans aren't for everyone, but, contrary to the image, most borrowers are not desperately poor.
Rather, they typically are on a tight though manageable budget, with an average income between $25,000 and $50,000. All have bank accounts; a majority has some college education; almost half own their homes.
What they all have in common is that they face unexpected expenses. But the necessary amount is too small and period is too short to get a typical bank loan.
Moreover, to focus on the cost of payday loans misses the most important point. Critics of advance payday loans ignore the cost of the alternatives.
For some people it's not meeting an unexpected expense - a pressing car repair, bill, dental procedure, or medicine, perhaps. The result could be loss of work and income, increased costs, pain, and inconvenience, and more.
Another alternative is to rack up hefty late fees and interest charges by failing to pay a bill on time. Or by bouncing a check.
A Georgetown University study figured that taking out a $100 payday loan to pay a $50 credit card bill and $50 utility charge cost less than the late fees from failing to pay. The payday loan also won't damage a person's credit rating, making it more difficult to win affordable longer-term loans in the future.
People who need money also might find a more expensive alternative to raise funds. Like a pawn shop. Or a loan shark.
Given these alternatives, a National Taxpayers Union poll found that nine of 10 people considered advance payday loans a useful service.
But payday lending critics don't care about people's actual needs and don't believe that people are smart enough to decide what is in their best interest. Complains Julian Bond, chairman of the NAACP: payday lending is "threatening the livelihoods of hardworking families and stripping equity from entire communities."
Actually, what threatens "the livelihoods of hardworking families" are the money emergencies that payday loans help address. Eliminating the means of meeting financial challenges without addressing the financial challenges themselves would make people worse off.
No one, not even members of the advance payday lending industry, contend that such loans are for everyone and for every purpose. But payday lending is an important option for families that face unexpected financial challenges.
When government seeks to protect people from themselves, it usually ends up preventing them from protecting themselves. Borrowers, not self-appointed consumer advocates, should determine the future of the payday lending industry.
Doug Bandow is a senior fellow at the Cato Institute, a Townhall.com member group.
©2004 Copley News Service
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