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)