4 things about payday loans
- Payday loans arent intended to be long term, so the APRs opponents spout out is on an unfounded assumption that the loan is going to take a year to pay back when it will (is supposed to) take 2 weeks to a month.
- Many people who use payday loans do so in order to not bounce checks. Bounced check fees can be multiple times worse in terms of (misapplied) APR rates. Imagine a $35 charge (interest rate) for a $5 over draft?
- The majority of those who oppose them never have or will use them. The people who do use them overwhelmingly oppose a ban on the loans.
- If payday loans go away, where will the people who need them turn for short term loans? Loan sharks? Criminal behavior? I think it’s safe to say that people who find themselves in the regular predicament of “needing” a payday loan aren’t the most fiscally or socially responsible (make poor life decisions) people to begin with, removing the one safe safety net they have would really make their lives that much worse.
My family and I recently traveled cross country and I looked for inexpensive hotels for our overnights. I discovered that the average price for a decent hotel was about $70.00 a night. So let me see. $70.00 a night equates to about $2100.00 a month for rent. Wow, what a rip off for a one-room kitchenless, unit in a so-so neighborhood next to a freeway.
So there I was, getting sleepy, in dire need of a place to lay my head, and waiting for me were these greedy hotels wanting to gouge me just because they could. Man! Greed is so ugly.
So, what I propose is a law that makes it illegal for these shady types to charge so much to people who have no other place to stay. Let’s see, the going rent payment for a family of 4 is, say, $1000.00 a month. This equates to about $32.00…
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Sifting Reality 
The underlying costs of providing financial services to people in low-income neighborhoods are likewise ignored by much, if not most, of the intelligentsia. Instead, the high rates of interest charged on personal loans to the poor are enough to set off orgies of denunciation and demands for government intervention to put an end to “exploitative” and “unconscionable” interest rates. Here verbal virtuosity is often used by stating interest rates in annual percentage terms, when in fact loans made in low-income neighborhoods are often made for a matter of weeks, or even days, to meet some exigency of the moment. The sums of money lent are usually a few hundred dollars, lent for a few weeks, with interest charges of about $15 per $100 lent. That works out to annual interest rates in the hundreds – the kind of statistics that produce sensations in the media and in politics.
The costs behind such charges are seldom, if ever, investigated by the intelligentsia, by so-called “consumer advocates” or by others in the business of creating sensations and denouncing business that they know little or nothing about. The economic consequences of government intervention to limit the annual interest rate can be seen in a number of states where such limits have been imposed. After Oregon imposed a limit of 36 percent annual interest, three-quarters of its “payday loan” businesses closed down. Nor is it hard to see why – if one bothers to look at facts. At a 36 percent limit on the annual interest rate, the $15 in interest charged for every $100 lent would be reduced to less than $1.50 for a loan payable in two weeks – an amount not likely to cover even the cost of processing the loan, much less the risks of making the loan.
As for the low-income borrower, supposedly the reason for the concern of the moral elites, denying the borrower the $100 needed to meet some exigency must be weighed against the $15 paid for getting the money to meet the exigency. Why that trade-off decision should be forcibly removed by law from the person most knowledgeable about the situation, as well as most affected by it, and transferred to third parties far removed in specific knowledge and general circumstances, is a question that is seldom answered or even asked. With intellectuals who consider themselves knowledgeable, as well as compassionate, it would seldom occur to them to regard themselves as interfering with things of which they are very ignorant – and doing so at costs imposed on people far less fortunate than themselves.
A New York Times editorial, for example, denounced the payday loan providers’ “triple-digit annual interest rates, milking people’s desperation” and “profiteering with the cloak of capitalist virtue.” It described a 36 percent interest rate ceiling as something needed to prevent “the egregious exploitation of payday loans.” How much good it may have done the New York Times to say such things tells us nothing about whether it did any good for the poor to have one of their already limited options taken off the table.
Thomas Sowell, “Intellectuals and Society.”
Great article Glenn