Are Payday Lenders Bad? They serve a vacuum
Protecting the poor with no credit history against predatory loans is a decent thing to do. But how far do we have to go to restrict access to money by claiming that we always know what’s best for them?
Should we continue to ban businesses from lending to cash-strapped people who otherwise could not get a conventional line of credit?
EDITORIAL: New name, same bad payday loans
This is the ideological dilemma of the conservative Arizona state government and those who see it as their duty to protect the underprivileged, the people who live on paychecks or face financial hardship. unexpected.
The fight against these types of high interest loans – often referred to as payday loans – pits free market principles against socially minded advocates who view the industry as wicked and immoral.
Support for the industry has waned across the country, given restrictions in some states, but the fight for a comeback resurfaced in Arizona this week.
What legislators propose
Lawmakers in the Republican state are once again proposing legislation allowing payday loans, but this time they suggest capping a line of credit at $ 2,500, which must be paid off in one year. Using a legislative maneuver known as the Strike of Everything amendment, lawmakers passed Bill 2496, which would allow lenders to charge borrowers a daily “transaction fee.” 45% or about 164% per year.
Arizona residents joined the crusade against payday loans in 2008, banning sky-high fees and capping interest rates at 36%.
Today, 38 states have laws that allow payday loans and 11 jurisdictions prohibit or cap interest rates, including Massachusetts, New Jersey and Pennsylvania, according to the National Conference of State Legislatures.
Critics say these types of loans trap the most vulnerable in paying outrageous fees, plunging them into even worse financial chaos. Advocates such as Republican Senator John Kavanagh argue that credit cards and student loans, not payday loans, are the debt that is choking Americans. Meanwhile, Senator Debbie Lesko stressed the need for quick cash.
Which side is right? Both are to some extent.
For example, there is no contesting the need for access to loans – the supply and demand of a free market society.
The disagreement is over what to do about the need for short-term liquidity and the stringency of government regulations.
Don’t forget those caught in the middle
In the midst of this socio-political debate, real people are in desperate need of money. Many of these people live below the poverty line – those who earn around $ 24,000 a year for a family of four. Some have poor or no credit histories and have dried up all other alternatives, including turning to family members for help.
I understand the need for some sort of regulation to protect the poor from lenders who prey on them for making a big profit. But we shouldn’t neglect personal responsibility either. We must not act like the all-powerful who always knows best or hang out with people just because of their economic status.
MY TURN: Why Arizona Needs These Loans
Is 164% annual interest exorbitant? Of course, but you also have to consider the risks that lenders take. The sooner a borrower pays off their debt, just like credit card debt, the less money they pay in fees. Would you lend a few hundred dollars to a stranger with no credit history and no collateral? I bet the answer is no.
Atlantic, in a comprehensive article published in May 2016, examined the vast payday lending industry and found that it serves over 19 million Americans, with a typical borrower being a white woman aged 25 to 44.
The Pew Charitable Trusts estimated in 2013 that 12 million Americans take out small loans each year, while the nonprofit Mission Asset Fund reports that 64 million consumers have no credit scores and 17 million do not. do not have access to a bank. Account.
A better way out of our borrowing problem
It is a crisis of enormous proportions. The root of the problem is poverty, lack of education in general and financial literacy in particular.
Is the Payday Loan the Perfect Solution? No. But that doesn’t mean getting rid of the option altogether – not until more people have emerged from the financial shadows.
The solutions are complex. We can agree on general ideas: let people decide for themselves, aggressively provide them with financial information, and start formalizing personal loans.
The work of Mission Asset Fund, which facilitates lending circles – people borrowing from each other – is a good idea.
Loan circles work like this: a group of, say, 12 people decide to create a loan circle. Each participant pays $ 50 per month. And every month someone withdraws $ 600 until everyone has had their turn. Mission Asset Fund reports the payment of $ 50 to the credit bureaus.
Participants have the money in bulk. And, they’re accountable to the other 11 people, said Phoenix attorney Jim Barton, who is trying to work with his congregation at Chalice Christian Church in Gilbert to establish one of those lending circles.
“It’s a cool system,” he said. “(But) there are limits, especially if you have an emergency and it’s not your turn.”
Church pastor Reverend Abigail Conley said lending circles have been successful in developing countries and the people who have benefited the most are those with no credit history, the immigrants and victims of domestic violence.
“We want to break the cycle of poverty,” Conley said.