I’m strongly inclined to liberality of laws when it comes to lending. That is not just because as a lenders’ agent I have a conflict of interest. I actually detest the paternalistic idea that lenders trying to lend money at a profit is something bad. We have a ridiculous situation in Australia in which if you want to take leave without pay, go on maternity leave or just resign from your job and start a business or take a break using hard earned savings, it’s basically illegal to lend to you even if you have your head screwed on. If people really feel the need to sign up to bad deals then, short of ensuring that they have reasonable information about them I don’t see a role for governments tin stopping them.
I think the same on principle about payday lending – in which people pay what are huge rates of interest for short term loans. Translated into interest the rates are 400 – 1000% based on a survey in the US. That sounds outrageous, but this is a fee of $45 on an advance of $300 – and a large amount of it is not interest but transactions cost.
I was nevertheless amazed to read these facts in the recently released (US based) Journal of Economic Perspectives.
- Virtually no payday loan outlets existed 15 years ago
- today, there are more payday loan and check cashing stores nationwide than there are McDonald’s, Burger King, Sears, J.C. Penney, and Target stores combined.
Given that payday loans are so bad for your financial health it looks like some major irrationality going on here. I’m thinking that the state should be taking some intelligent interest in this, if for no other reason than what I expect would be its tendency to deliver its self chosen victims into the hands of social security systems, perhaps stimulate crime in various ways and also ‘normalise’ the idea of bankruptcy by increasing its incidence.
Of course you can argue that payday lending does the opposite of all these things since it gives people beginning to consider some of these options one last chance before taking them up. That’s certainly how I’d feel if I had to use one and I’d be incensed at not being given my last chance. But on those figures it doesn’t seem that’s how it’s being used.
Reminds me of the issues raised in the post on obesity a few months ago.