Payday Lenders Are Just A Symptom

Payday lenders receive buckets of bane for preying upon low-income, under informed borrowers, as ruminated upon in a recent NYT piece:

“The problem is that many people have difficulty weighing the trade-off between immediate benefits and future costs. When confronted with easy credit access, some inevitably borrow more than they can reasonably expect to repay. Once they get in over their heads, they borrow more, if the law permits. It was thus all but certain that millions of society’s most economically vulnerable members would borrow themselves into bankruptcy if confronted with easy credit access. If we are unhappy about that, the only recourse is to change the rules.”

….but rather than blame the payday loan centers….

“A more deserving target would be legislators who supported lax credit laws in exchange for campaign contributions from lenders — or, better still, those who have steadfastly resisted campaign finance reform.”

Or better, still, why don’t we get taught fiscal responsibility in school? We have to memorize the periodic table, but no time is spent on vigorish.

You can’t just pop the pimple, you gotta squeeze out the seed. — BEN POPKEN

Payday Loans Are a Scourge, but Should Wrath Be Aimed at the Lenders? [NYT]

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  1. snazz says:

    eww, dont say ‘seed’

  2. Gari N. Corp says:

    To be honest people’s inability to assess accurately the “trade-off between immediate benefits and future costs” – the time value of money – is at the heart of quite a few debates in economics and politics. It’s probably why George Bush got re-elected on promise of spending squillions on the Iraq war and cutting taxes at the same time.

  3. Anonymously says:

    Protecting people from their own stupidity or ignorance by enacting laws makes tons of sense. I mean, making suicide illegal is the most important thing any law-making body can do.

    Making it illegal to loan money to individuals who cannot grasp the concept of “debt” is the second most important.

  4. VA_White says:

    If someone breaks the law and commits suicide, we end up with one dead guy to bury. If someone breaks a theoretical law about borrowing too much money, we end up paying for his bankruptcy through higher prices at his creditors, his food stamps, AFDC,free lunch for his kids at school, etc.

    It is already illegal to lend money to people unless you have a reasonable expectation that they will repay it. But no one with any authority over the lenders seems to think lending 250,000 to a guy who makes $25,000 a year constitutes a predictable risk of default.

    Interest-only mortgages, while they may be the only way regular folks can buy a home in SoCal, are criminally predatory by their very nature. No one should be allowed to borrow 500,000 for a bungalow in San Jose and pay only the interest for five years.

    It is going to take a combination of intensive financial education and ruthless enforcement of existing law to make the slightest dent in the problem.

    I am getting ready to sell my house and my realtor was astounded that I wasn’t carrying a red cent in home equity loans. “You paid CASH for your remodel?” Yes, Billy Boy, I did. And I paid 3/4% more on my mortgage to get a 30-year fixed. My neighbors are eating mac & cheese because their house payments went up $600 a month – the same neighbors who laughed at us for playing it safe five years ago. I’ll be laughing all the way to the bank, you yahoos.

  5. Anonymously says:

    I think the article and Ben are both correct. Payday centers are an inevitable side effect of our economy. I don’t have a problem fixing it, I just have a problem with the moral outrage against these places. They exist solely due to demand.

    Unfortunately, as VA_White points out, I pay for all of schmucks that get caught in the downward spiral, and I do have a problem with that. Hmm…what to do?

  6. RandomHookup says:

    I’m okay with these businesses as long as they sell lottery tickets, too, cause we want to keep all the stupid in one place.

  7. humphrmi says:

    I agree that we can not legislate good borrowers behavior. And I’m a huge proponent of the free market system, Milton Friedman, the “Invisible Hand”, yadda yadda yadda.

    BUT (you knew there was a BUT coming)…

    The reason reputable lenders incorporate and operate out of North Dakota and Arizona is because they can get around all the other state’s consumer protection laws that limit interest rates. These are the guys that are charging 25% on your credit card.

    The way disreputable lenders get around state laws (since they can’t expect you to drive to North Dakota to get your latest payday loan to pay off your last payday loan ad nauseum) is by calling them “Fees” instead of interest. And it’s a SCAM, plain and simple. These fees amount to hundreds of percentage points in interest and make your credit card companies seem like bargains.

    Close the hole, make them call it interest, make them adhere to the interest limits of the states that they operate in, and we’ll be 90% of the way there.

  8. thrillhouse says:

    It all goes back to the need for real financial literacy education at school and at home from an early age. Of course, that’s been said about sex and drugs for decades and we see how well that works by itself. There is a need for legislation.

    This industry is glorified loan sharking, legitimized by a store front in a strip mall. Drug dealers exist because of demand, it doesn’t make it ok. These vultures prey on the poor and uniformed, and someone does need to stand up for them.

  9. Kornkob says:

    I don’t have a problem fixing it, I just have a problem with the moral outrage against these places. They exist solely due to demand.

    Wait. I forget. Are we talking about schoolyard crack dealers? Cause I gotta make a living too, man. If these kids didn’t want my product, I wouldn’t be here.

    Oh— and I’m all outta the E, baby. Apparently the 8th grade Sadie Hawkins dance is this weekend and them chicks is getting all tooled up.

    But I got a fresh batch of crank, still warm. Trust me– Phys Ed is a freaking BREEZE when you spun up, son.

    Here, the first one is on me. You can pay me back on payday.

  10. Anonymously says:

    The linked article admits that payday loans are very much like heroine. Drugs are outlawed (partially) due to moral outrage.

    If adults without familial responsibilities want to bake their brain on drugs, that’s their choice, but selling drugs/loans to children doesn’t have anything to do with this discussion.

  11. Ben Popken says:

    What’s interesting about some of the commenters seemingly random drug references is that the author of the original article actually likens payday loans to heroin and cocaine.

    Evidence suggests that easy credit access is more like heroin and cocaine than alcohol. This evidence recently led Congress to cap the annual interest rate on payday loans to military personnel at 36 percent. In New York and 10 other states, similar restrictions apply to loans to the general public, in each case making payday lending effectively illegal.

  12. Kornkob says:

    The thing is that a big part of the reason that many drugs are illegal is less about ‘moral outrage’ and more about societial costs of having a flood of people ravaged by the addictive and destructive chemicals.

    It is VERY analogous to payday loans. Both drug dealers and payday loan companies largely target poor, uneducated young people with deceptive claims and easy access to rope in customers who then get stuck in a cycle that is enormously difficult to escape. The end result is someone who still doesn’t have reasonable coing skills and now has incurred costs that are passed on to society at large.

    Now– does this apply to ALL drug dealers? No. I’ve met a couple ethical, upstanding purveyors of controled substances. The products they carried were of good quality and they wouldn’t sell to someone they didn’t feel understood what they were getting into. Then again, I’ve seen financial institutions that lend respnsibly too. But we’re not talking about them. We’re talking about the kind of scum who hang around schools and try and take advantage of people who aren’t yet equipt to understand what they are getting in to.


    In the end we’re going to pay for it, not them. Regulate it. Unlike drugs I doubt we’d see a surge in ‘illegal lenders’ operating on corners. Why? Because the ‘demand’ for this isn’t really all that strong.

  13. abartonkc says:

    Oh man, my sides are aching after reading that legislators should be the ones responsible for developing better credit laws. Are we talking about the same legislators that has created our 3+ trillion dollar national debt? The same legislators who continue to deficit spend yearly? These are the folks we should look to for good solid fiscally responsible laws on what is an acceptable debt level? I’m just glad I wasn’t drinking my coffee when I read this, otherwise it would have shot out of my nose.

  14. tz says:

    In school, responsibility in another area is taught by giving out condoms and having the local clinic’s number in the School Nurse’s office.

    If we taught fiscal responsibility in school the same way, every 8 year old would already have a credit card.

    Then there’s the food in the cafeteria and vending machines.

    If I had time, I’d go through the rest of the deadly sins…

    You can’t teach virtue or responsibility, only the consequences of vice, and even then what seems to be taught is how to minimize the penalty or bad effects, not how to avoid it.

    C. S. Lewis once said “We laugh at honor, and are then surprised to find traitors in our midst”.

    We laud materialism while disrespecting prudence and delayed gratification as well as plain savings (which are punished with taxes) and are surprised at the high levels of debt.

    What exactly WOULD you teach in school?

  15. “Or better, still, why don’t we get taught fiscal responsibility in school?”

    As noted before, it’s mandatory in Illinois to take AND PASS consumer education to graduate from high school.

    It hasn’t resulted in a noticeable uptick of statewide fiscal responsibility or comprehension of monetary issues.

  16. Ben, here’s a 2000 curriculum guide for Illinois mandatory consumer education for high school students:

    http://eric.ed.gov/ERICDocs/data/ericdocs2/content_storage

    My understanding is that they’ve since added identity theft to the curriculum.

    Page 4 of the pdf gives the broad overview.

    Flip through it — do you think it’s adequate to teaching what consumers need to know? If so, why hasn’t it had an impact on Illinois’s overall level of consumer awareness? It became mandatory in the 1986-1987 school year, so all Illinois high school graduates under the age of 35 should have passed the class.

  17. spanky says:

    Of course we should be pressuring legislators to pass more consumer protection laws, but that doesn’t mean predatory lenders themselves should get a pass.

    I mean, if you want to argue that they’re just acting instinctually, like lions or something, then fine. But whether I consider them morally culpable or not, if I see one on my street, I want it to be shot with a tranquilizer dart and relocated to an area where it will no longer pose a significant danger to my community.

  18. thrillhouse says:

    What exactly WOULD you teach in school?

    This

    And keep the credit card companies out.

  19. pvtxtyc says:

    Well I am not playing the advocate for either group here… I will say in the defense of the “poor, ignorant burdens” on our society who are the prey of these disreputable businesses offering a very trend-America business service that if our credit system didn’t operate like a caste system that some of our lovely Wal-Mart stockers might be able to actually get credit cards (not that the rates would be much more reasonable).

    And yes, sex education, drug education, and credit education are a standard in every high school. Most of it takes place behind the gym or on school trips. The credit education will come with time. These days some people have already had their credit ruined for life before they are out of middle school… They may as well drop-out now to get in the welfare line because they will never have a house, never get a good job, never have a nice car, or a credit card.

    If you take away their Payday Loans they will have no way to pay for their condoms and needles… then we will have to suffer the tax-burden of another generation of hard workers that do the thankless jobs for an annual salary comparable to your electric bill.