Usury Is Good For You

Usury is good for you. That’s the lesson from an article in today’s WSJ using empirical evidence to defend the practice of charging 200% interest rates.

A randomly selected pool of Latin America borrowers who were just below the normal level of credit worthiness were approved for a 200% 4-month installment loan. A control group was denied based on normal policies. Tracked over the next two years, the group with the high-interest loan made more money, went less hungry, had better credit scores, and were happier than their control group. They also had higher default rates.

“Rolling over payday loans repeatedly might cost you big bucks,” Yale professors Dean Karlan and Jonathan Ziman write, “but it can turn out to be a good deal if you need the initial loan to fix your car, hold on to your job and avoid losing even bigger bucks in after-tax earnings.” They argue that it’s lack of access to available credit that does more harm than the high interest loans. They say that policy makers shouldn’t try to stop high interest loans from happening, and instead there should be maybe better loan disclosure laws, or opt-out employee savings plan.

Here’s the thing, though. They’re obviously trying to draw an angle to the pressure and scrutiny the American payday loan industry has fallen under. But compared to the rates American payday loans charge, 200% is nothing. We’re talking rates of 400%, 651.79% and 800%. There’s also all sorts of fine print fees which can trip consumers up. That’s a whole different hog to roast than a straight-up 200% installment loan. We bet the tweed jacketed fellows would have seen higher default rates and lower levels of prosperity, happiness, and well-being had they run their experiment using American payday loan rules.

Also, they select from just below the line borrowers. Well, payday loans are given not just to below the line borrowers, but all the way down to the gutter bottom of credit worthiness, to people who never ever will be able to pay off the loan in full.

So, the profs end their piece by saying more research is warranted. We agree – let’s see a similar study using some American payday lending rules. They may have some difficulty designing he study, however. In most areas, payday loans are unregulated. It will be difficult, then, for the people running the study to decide which kind of usurious payday loan to use as a standard.

In Defense of Usury [WSJ] (Thanks to Chris!)
(Photo: ninjapoodles)

Comments

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  1. howie_in_az says:

    Isn’t this just trying to regulate against stupidity? If customers are stupid enough to take out a loan they can’t repay and the businesses are stupid enough to allow said customer to take out a loan they have little/no chance of having repaid, why should anyone step in to say “wow, you’re both incredibly stupid and I’m not going to allow this”?

  2. TheCFC says:

    It seems like Consumerist is more and more in favor of increased regulation in loans, product safety, etc. but why? Do you really want the government more involved in your daily life? If Payday loans cost 800% to the lowest credit tiers and you’re upset about it, go open a payday loan store and charge less than your competition. You will either be correct, and make a ton of money taking customers from the other stores, or you will be wrong and go out of business due to credit losses. Who is Consumerist or the government to say how much a business can charge for its services?

  3. goller321 says:

    This is loan shark plain and simple. Lenders need to be regulated on how much interest they can charge. 200% is robbery.

  4. goller321 says:

    @TheCFC: The government is a group representing (hopefully) the people. People such as yourself that claim that nothing should be regulated are the ones that want to guarantee the middle class disappears and we are left with only the haves and the have nots…

  5. Tux the Penguin says:

    @goller321: The reason that the interest rate is so extreme is the fact that the company is facing such a huge risk by loaning money to these people. And obviously the “customers” can afford these extreme interest rates because the companies are still in business… Its a tough matter to deal with because ultimately it falls between two consenting parties. Now, suddenly cash advance from credit cards are a steal, aren’t they?

  6. homerjay says:

    “Are you familiar with our states stringent usuary laws? Oh! Well, I must have just made up a word that doesn’t exist!”

  7. phantomoftheopry says:

    @TheCFC: The Government is made up of “We, The People”. A business is made up of a small number of individuals. Being in favor of more regulation (as I am) is to me simple utilitarianism: the needs of the many to thrive, and keep the country thriving in turn, outweigh the needs of the few to screw people over for their own selfish benefit.

  8. howie_in_az says:

    @goller321: Why don’t the customers that frequent these places take their business elsewhere? Perhaps they’re OK with 200%. Personally, I’m not, thusly I won’t do business with these sorts of lenders… but again, like I said earlier, this seems to be trying to regulate against stupidity.

  9. kimsama says:

    To the haters: regulation prevents market failure, which is bad for everyone. You don’t think the only people affected are the ones taking out the bad loans, do you? When they drive up social programs’ costs, and medicare/aid costs, and help inflate the housing market (which later crashes), we are all affected. goller321 is spot-on. Regulation protects those of us who actually, y’know, pay taxes and stuff (e.g. the middle class).

  10. kimsama says:

    Haha, d’oh. i.e. the middle class!

  11. XianZomby says:

    That’s 200 percent annual percentage rate, according to the WSJ: “The lender charged its normal rate: 200 percent APR.” If you borrowed $1000, for four weeks, you’d owe them back $1076.92. That $76.92 dollars to borrow $1000 for a month.

    Divide the APR by 26, and that’s the interest you’d pay for a two week “payday loan.”

    If for a two week loan of $500 they tell you it’s going to cost you $115 – for a total repayment of $615 – that’s a loan at 23 percent. Multiply that by 26 and it becomes the “outrageous” 600 percent – the APR.

    For military members who were “unfairly targeted” by payday loan lenders, Congress set out to cap APRs on loans to military members at 36 percent (SA 4331.). In fact, I believe that law took effect last month.

    A 36 percent APR works out to paying about 1.384 percent on a two week loan. You can’t stay in business loaning somebody money at 1.384 percent.

  12. XianZomby says:

    @XianZomby: I meant $153.38 dollars for a month, not $76.92. Sorry.

  13. ShortBus says:

    How do these places ensure loan repayment? Garnish wages if you don’t repay?

  14. gershinator says:

    Regulation = bad.

    Why is it that the government always wants to restrict activites between 2 consenting adults as a means to “protect” individuals. Sure, some things are sick and mean, but that’s not for me or anyone to decide.

    I could rant on and on, but it’s that simple…whether it’s APR or sex or drugs…let it be.

  15. JustAGuy2 says:

    @kimsama:

    Actually, the people who pay taxes aren’t really the middle class, they’re the rich. More than half of all income taxes are paid by the top 5% of earners (or course, they also earn about 1/3 of the total income). The bottom HALF of earners pay only 4% of total income taxes (while receiving about 14% of total income).

  16. Ben Popken says:

    Thanks to government regulation, we no longer have rat feces in our baked beans. At least not as much.

  17. Scuba Steve says:

    Having money > Not having money.

    Having a budget > paying 200% usury.

  18. Ben Popken says:

    @ShortBus: They harass you and your family members and neighbors and workplace and/or sell your loan to a debt collector.

  19. Ben Popken says:

    Also, this post isn’t saying “yay regulation.” I’m taking aim at the conclusions and paralells the study’s authors are making.

  20. mac-phisto says:

    ok, ok, i have an idea: we won’t regulate the industry (insofar as what they choose to charge for a loan), HOWEVER they must relinquish their right to reclaim any lost funds thru any government entity.

    seems fair – no regulation for them & i don’t have to subsidize their use of the court system to recover their money.

  21. JustAGuy2 says:

    The only thing worse than borrowing at a 200% APR is not being ABLE to borrow at a 200% APR.

  22. bunnymen says:

    On a (much, much) smaller scale, this is why I stick with my ridiculously high credit card interest rate – it guarantees that I won’t let myself carry a balance.

  23. Mr. Gunn says:

    Ben has a good point – access to some credit is better than none – but there does com a point at which that is no longer true, and that point is probably somewhere north of 200% APR.

    For those of you who don’t realize yet that you and everyone else has a vested interest in keeping people, even those who don’t know better but should, from being ripped off, just consider the long term effects of such a “no compassion” policy. You’ll end up with a large number of people considerably worse off than they are now, which will mean they’ll be less educated, less healthy, and produce children who are the same. Those people will have fewer chances to contribute to society, and there will be more of them around to mug your children and grandchildren.

    So far the “yeah, but it won’t happen in my lifetime so I’ll just go live in a walled subdivision” school of thought has worked so far, but, like all bubbles, must eventually burst.

    It’s our job now to ensure that when it does, things won’t have degenerated too far. Not everyone is cut out to be a saint, which is why little things the government does, like collect taxes and regulate industry, should be accepted as the trade off for living in a civilized society instead of one made up of Morlocks and Eloi.

  24. lmedsker says:

    A few comments, one, payday lending is highly regulated at the state level in the 37 states where storefront lenders operate. Regulations include, among other things, capping the amount customers can borrow and the fees lenders can charge. States also generally either prohibit loans from being “rolled-over” (i.e., extended with another fee being charged) or limit such rollovers to one or two times.

    Those of you who are discussing the difference between 200% APR and 600% APR don’t fully understand short-term credit. These are not annual loans. They are two week loans. The fee for the loans is a flat fee, no hidden fees, application fees, etc. It’s a flat fee charged per $100.

    At 36% APR, the fee on a $100 loan would be $1.38; at 200%, the fee on a $100 loan is $7.67; at 391% APR the fee on a $100 loan is $15 (this is the typical charge for payday loans in the US).

    For what it’s worth, the Goodwill charity is now offering payday loans in partnership with the Prospera Credit union. They charge $9.90 per $100 borrowed (equates to a 252% APR). And this is only to break even.

  25. AndyDuncan says:

    @howie_in_az:

    Actually most laws regulate against stupidity if you think about it.

  26. weg1978 says:

    Gee, what’s the rate of inflation in those developing latin american countries…that couldn’t possibly have an effect on rates. Try this for an intelligent discussion:

    [www.marginalrevolution.com]