The Black Informant | African American Commentary, News and Community Building

The Marvelettes sang the song "My Daddy Knows Best"

The Mavelettes sing “My Daddy Knows Best”

From wsj.com

For those who depend on taking out a loan in advance of a paycheck, life may soon get harder if Congress passes the Payday Loan Reform Act.

The bill’s sponsors, which include Rep. Luis Gutierrez (D., Ill.), say they want to clean up abuse in credit markets by clamping down on the prices lenders charge for payday loans. In reality, the legislation will reduce the supply of these loans and make borrowing more expensive.

The reform is based on the false premise that consumers take out these loans without realizing how much they are paying. True enough, these loans are expensive. A two-week payday advance of $300 typically comes with a $45 finance charge — an implied annual percentage rate (APR) of 391%. Critics say borrows could not possibly intend to pay that much for an advance on their paychecks, and that the cost alone is evidence of exploitation of the working poor.

But new research suggests that most payday borrowers are more rational and informed than critics believe. A January 2009 study by Gregory Elliehausen at George Washington University found that payday borrowers make informed choices. About half of the 1,173 payday borrowers he surveyed considered other credit alternatives — such as bank, credit card, or personal loans — before taking out a payday loan. Over 80% lacked sufficient funds in their bank accounts to meet their expenses, so by taking out a payday loan they avoided expensive checking account overdraft fees. Nearly 90% said they were either very or somewhat satisfied with the transaction.

[...]

Ron Phillips of Colorado State University and I examined seven years of payday-loan prices in 117 Colorado neighborhoods. We found that local markets with more payday stores tend to enjoy lower prices, but that the benefits of competition were largely been washed away when Colorado imposed a cap on finance charges. Over time, the longer a price cap remains in place the more borrowers get charges the legal maximum price. Price caps make these loans more expensive and less available. (more…)

I have personal experience with this issue, so allow me to repost something I wrote back in 2005.

Not too long ago, both my wife and I had to use the services of payday loan businesses (a couple of them) to make ends meet. As expected, all of the payday loan stores were located in what would be considered the ‘hood in many places. We walked in and spoke to the person at the counter. This person walked us through the whole process and told us when payment was due. From time to time during the conversation, we politely stopped the individual and asked them to re-explain points that we felt were not covered verbally on the full contract that was in front of us. Although we hated the fact that we were to pay some ridiculously high interest rate (somewhere like 350-400%–I’m not making this up), we knew what we had to do in order to make ends meet. We also understood that if we did not make payment all together, the collectors would come after us with a vengeance. I completely understand how someone can feel “tricked” if these terms catches someone by surprise. But “legal” payday loans businesses are required by law to have all the stipulations in writing and given to the customer. If the payday loan representative is talking too fast, tell them to slow their behind down—after all, it is your behind on the line.

In order to understand this issue, look at it from the prospective of the payday loan business.

The business itself is based on loaning out money to people who for WHATEVER reason did not have the means to get it any other way. Wouldn’t YOU want some assurances that you would get that money back? THAT IS THE RISK YOU TAKE. Another point that is also lost in this debate is the huge cost to the lender to order a repossession of asset. Banks are not in the business of warehousing TVs, furniture, cars, etc. They are strictly in the liquid asset business–that’s it.

For the lending institutions out there who do not provide these stipulations in print or communicate these terms to customers, they are clearly violating the law and should be punished.

But for most of these predatory loan cases, don’t be surprised to find out that not taking the time to read or ask questions was the main culprit. (more from “Solution to predatory lending: READ!!”)

Both the House and Senate are filled with lawyers who do not have the slightest idea on how supply and demand works. As the article suggest, placing a price cap on interest rates in this industry is going to reduce competition and give these businesses no incentive to offer the customer a lower price.

My wife and I have been to numerous payday loan shops both here in California and in Colorado. There were plenty of times we had to take out several loans at the same time from different shops across town. Every one of them explained to us the fees and posted the interest rates in big letters in front of the store for everybody to see. Any customer who is shocked at the fees AFTER THE FACT either ignored the signage, ignored the store rep, or simply do not understand English (Scratch that. Most of the payday loan stores we used provided a Spanish interpreter).

This is one of the many reasons why I laugh when I hear folks suggest that one of the reasons why Democrats get more of the Black vote is because they talk to and listen to their constituents. Yet despite the findings of the study mentioned in the Wall Street Journal piece that show payday customers tend to make informed choices, big daddy government knows best. Screw what the constituents think.

I believe the real people who are giving this “kill the payday loan shops” issue currency are people  who A. Notice the high interest rates, B. Notice the location of most payday loan shops, C. Notice the race of the individuals walking into these shops, D. Add A, B, C together. PRESTO! Cue the “Fight the Power” track.

Other bits:

In 2007, the Federal Reserve did a study on the payday loan industry and concluded…

“We define predatory lending as a welfare-reducing provision of credit. Using a textbook model, we show that lenders profit if they can tempt households into “debt traps,” that is, overborrowing and delinquency. We then test whether payday lending fits our definition of predatory. We find that in states with higher payday loan limits, less educated households and households with uncertain income are less likely to be denied credit, but are not more likely to miss a debt payment. Absent higher delinquency, the extra credit from payday lenders does not fit our definition of predatory. Nevertheless, it is expensive. On that point, we find somewhat lower payday prices in cities with more payday stores per capita, consistent with the hypothesis that competition limits payday loan prices.”

Also…

Using a small set of data, we find that payday loan rates and fees decline significantly as the number of payday lenders and pawnshops increase. Despite their alleged naivet ́e, payday borrowers appear sophisticated enough to shop for lower prices. The problem of high prices may reflect too few payday lenders, rather than too many. If scrutiny and prosecution risk limit entry into payday lending, the lack of competition may drive rates higher. In the end, the simple fact that payday lenders have triumphed over pawnshops suggests that payday lending raises household welfare by providing a preferable alternative.