3/27/2008 7:39:00 AM Lawmakers wrong on payday loans
Marc Kilmer
Ohioans did not send legislators to Columbus to make their personal financial decisions for them. Considering the poor state of Ohio's budget, it seems ironic that some in Columbus think their time is best spent focusing on the financial choices of others.
Unfortunately, a few legislators want to spend the General Assembly's time targeting payday lending instead of fixing the serious tax and budget problems which plague the state.
Payday lending involves borrowers taking short-term loans by putting up future paychecks as collateral. It is an increasingly popular option for some, although it has found critics looking to blame some of Ohio's economic problems on it. In reality, though, these loans are not a "net drain" on our economy. Payday loans are the same as any other loan - a borrower gets one amount of money with an agreement to pay a larger amount of money back to the lender.
The main difference between payday loans and other loans is that payday loans are for very short time periods - usually two weeks - and are offered to people who have credit issues and other financial problems. As economists who study lending will tell you, these types of loans have high overhead. The default rate is also much higher than other loans.
What that translates into is relatively high fees on loans. But just because an interest rate looks like a lot of money does not mean that it is unjustified. People want these short-term loans and they willingly agree to pay the fees and interest charged.
How much are these fees? In a recent column, Representatives Bill Batchelder and Robert Hagan claimed that these lenders charge a "391 percent interest rate."
However, a closer look finds something different.
In Ohio, almost all payday lenders charge borrowers $15 per $100 borrowed. That is an interest rate of 15 percent. If one assumes that a borrower takes a payday loan for a year, then it is possible that the yearly interest rate could add up to 391 percent.
But since these loans only last for two weeks, the only accurate way to describe the interest rate is 15 percent.
Reps. Batchelder and Hagan are also forwarding legislation to regulate these loans. They say the bill merely caps unreasonable rates. And, they say "efficient businessmen" can still make a profit under their proposal to allow lenders to only charge $1.50 per $100 borrowed on a two-week loan. However, testimony from people who actually run these businesses and economists who study this industry is almost unanimous in saying that current rates and fees are essential to pay the lenders' overhead.
Of course, there is nothing stopping lenders now from charging the interest rate proposed by Reps. Batchelder and Hagan.
If consumers were really being exploited by lenders as these legislators claim, then why hasn't an enterprising businessman entered the market to attract these customers at a lower interest rate?
After all, according to our legislators, a smart businessman could still make a profit. And since no one willingly pays high interest rates, current borrowers would flock to this lower-priced lender.
The answer is no lender could survive at these low rates because of their expensive overhead costs and the high default rates on these loans.
On the borrowers' side, lower-priced loans do not seem to be important. Numerous surveys show that payday borrowers care more about convenience than the price of the loan.
In short, as with every other economic purchase, people who take payday loans see the costs as being worth the benefits.
The common retort is that these lenders "trap" people into unmanageable debt. It is certainly true that many people take out multiple payday loans over the course of the year. When economists analyze why people do this, however, they find that the borrowers' underlying financial situation leads them into this behavior. It is not payday loans causing their financial problems. Instead, their financial problems lead them to seek payday loans. If legislation eliminates payday loans it will not eliminate the underlying financial problems of borrowers.
The attacks on payday lending do not bear up under scrutiny. Instead of wasting time on this issue, legislators should focus on the real financial problems facing Ohio.
These problems do not come from payday lenders - they come from the high taxes and high government spending that is dragging down the state economy.
If they truly want to help financially strapped Ohioans, the state's outdated tax code is a much better target than a few businessman offering short-term loans.
Marc Kilmer is a policy analyst with the Buckeye Institute for Public Policy Solutions located in Columbus.
Reader Comments
Posted: Wednesday, April 02, 2008
Article comment by:
formianqueen
Yes! Thank you so much for putting things straight. If freedom means anything to our legislators, they should not meddle in our personal financial decisions. It's disheartening that Columbus would rather meddle in the affairs of individuals than deal with its own business.
Posted: Saturday, March 29, 2008
Article comment by:
Grant
This article shows how payday stores help: Payday lenders are the perfect target for politicians that want to seem compassionate. After all, a $15 fee on a two-week $100 loan amounts to an APR of 390% if the loan is rolled over for a year (accruing $15 every two weeks). What could be more evil than charging poor people 390% interest, right?
A recent study by the Federal Reserve Bank of New York suggests otherwise. As reported in the March issue of Reason Magazine, the study found that the citizens of two states where payday lending is banned "bounced more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy more often"1. Comparing payday lending to other options, the Community Financial Services Association of America noted that a $100 bounced check garners a $54 fee (equivalent to 1409% APR) and a $100 credit card balance can garner a $37 late fee (equivalent to 965% APR). As the study's authors write, "Forcing households to replace costly credit with even costlier credit is bound to make them worse off".
Gov’t has now found it important enough to make $30 decisions for consumers. What’s next, See Candies will probably be required to see dental records before they can sell a box of chocolate. It’s ok to buy $100 in lottery tickets with your SSI check, but spending $30 on a payday loan is forbidden. Gone are the days of freedom. Do I need my government telling me how to spend $30? $30 is the fee for my last payday loan. I am a hell of a lot better equipped to make $30 decisions than my government. Will my Government please stay out of my $30 life, and worry about bigger, more important things. For example, the billion dollar Iraq war? The economy and inflation would be nice...I got a payday loan to pay $75 at the gas station the other day. What about the guys who spend $100 on lottery tickets every week...is that a better value then a payday loan...that's government sponsored! Hell, our government can't replace a toilet for less than $10k, so why meddle in my $30 world? A little bitty payday loan is the best you guys can come up with? Bounced check fees, overdraft protection and credit card late fees are more expensive than payday loans. A $10 checking account error can cost $27, and a $15 late payment on a credit card can cost $37. Why do Senators want to limit the interest on payday loans, force the industry to shut down and put tens of thousands out of work during a recession? Why do they want to take away this cheaper, preferred credit option, denying access to credit to hundreds of thousands of average middle-class, and all class folks? Why do they want to increase the number of bounced check fees and credit card late fees paid to banks and credit unions? Whose side are they on? The consumer? I don't think so? I think they are on the side of the banks, how much are the banks paying these Senators and "lawmakers"? Why are they so worried about this little payday loan industry? It is helping, so leave it alone!
