Sunday, December 17, 2006

Pay Day Loans are the Result of Progressive Regulation

I just read an article in the Salt Lake Tribune (The Tribune's policy is to break all inbound links after 90 days: Easy Money With Strings Attached.)

The article does a good job pointing out the idiocies of progressive government. The article begins by deriding the excessive interest rates of PayDay loans companies. I happen to agree. PayDay Loan rates border on the ludicrous. The loans are for small amounts, and a short duration. The loaner charges a lending fee, as opposed to interest (like bonds). That fee might be something like $8 to borrow $100 for two weeks. This is an outrageous interest rate! PayDay Loan companies often provide check cashing services along with the loans. If a person is unable to pay their loan in 14 days, they have to borrow again. In just 13 cycles (182 days) the fees on the loan have exceded the amount of the loan.

I agree with this part of the article. PayDay Loan companies are a big rip off. I would never do business with one. I strongly advise people to avoid such institutions; if they can.

These Check Cashing / Pay Day loan companies exist because there is a growing segment of the population that is underserved by traditional banks. A personal with marginal finances will end up paying more in the way of fines and fees if they tried using traditional banks.

It is after making the case that PayDay Loan companies are bad for consumers that we get into the idiocy of Progressive politics. After making the case that payday loans are bad for consumer, the article presents the progressive solution to the problem: Limit the number of companies that make PayDay loans!

The progressive solution to usery in the subprime lending industry is to prevent new competition from entering into the industry.

A person with even a little bit of common sense (which excludes all Progressives) would realize that preventing people from entering the field of subprime lending industry has the effect of eliminating compentition...which will keep the interest rates ridiculously high.

I do not like the PayDay lending scheme.

Rather than playing the game of calling the people in the industry evil, I want to first look at the reason why people use these companies. The primary reason that people use subprime lenders is that they are underserved by main stream banks.

The next question I ask is why there are no banks ready to serve these people?

The answer here is simple: The regulations of the banking industry have raised the bar of entry so high that it is now impossible for small investors to get together to create a new bank that serves this underserved population.

In many ways, the evils of the PayDay Loan industry come directly from past efforts to regulate the industy and the ways the loans are defined. For example, the loans are designed for a two week period. Imagine that you just got a new job. Your first paycheck will come in one month (30 days). You need $100 to buy a new outfit for the job. Since you check will not show up for 30 days, you will need to run your payday loan through 3 cycles ... incurring a $24 fee.

The payday loan is a very good deal when you have the specific need of a one time loan for exactly 14 days. The loans are a bad deal when your needs differ from that tight definition.

Does the above argument make sense? A person with marginal finances needs a great deal of flexibility from their lenders. Extremely tight regulations often have the effect of eliminating that flexibility. Since the regulations prevent the person in need from getting the loan that best fits their needs, they end up getting the wrong loan ... and it costs them big bucks.

The financially maginal groups in this world need greater flexibility in their lending than is provided by our hyper-regulated banking system can provide. Limiting the number of banks serving the low income (as Progressive suggest) will only worsen the problem.

The article does point a few good solutions. One of the big problems with the PayDay Loan program is that borrowers will often make multiple loans from different companies. A person needing more money than is allowed by the regulated cap on payday loans is apt to run from store to store until they've borrowed the money that they need. This game increases the fees that they will pay, and increases the risk of default.

Some states require lenders to record the loans in a common database.

It's the Christmas season, which means reruns of It's a Wonderful Life. This Christmas classic was recorded in the days of black and white, when it was still possible for George Baileys of the world to make a difference in their community. Unfortunately, the snearing Progressives of the world have choked our society with so much regulation that there is no longer a place for George Baileys who would go out of their way to help the marginal in our society with finances.

Speaking of snearing progressives. Did you note how Lesley Mitchell went out of her way to point out that the owner of one of the PayDayLoan companies was a Republican?

Yes, a large number of businessmen in industries being battered by progressive politics become republicans. Of course, Ms. Mitchell is playing a different game. We are supposed to hate PayDay Loan companies for using the poor by lending them money (when no-one-else will). We are supposed to come away from the article hating the companies and above all hating the evil-Republican companies that try to serve the underserved. Personally, I've gotten to the point in life that I like the businessman who is trying to serve the public more than the progressive critic.

1 comment:

David Farias said...

If you really want to do something about pay day loans then go to www.fygo.com and start a lending network. Your friends and family will thank you for it!

Your Friend in Finance,

David Farias
Founder
FYGO