Our View: Fix payday lender symptoms, then causes

From the Wausau Daily Herald (6/28/09)

We recently editorialized in favor of proposed new limits on payday lenders, those storefront lenders that give short-term cash loans mostly to people who live paycheck-to-paycheck.

We haven’t changed our minds. Wisconsin’s Predatory Lending Consumer Protection Act, which would cap interest rates for consumer loans at 36 percent annually, should be made law.

After our last editorial was published, we had the opportunity to speak to Erin Kreuger, the executive director of the Wisconsin Deferred Deposit Association, a trade group representing the lenders. Some of Kreuger’s information and arguments are worth discussing.

For one thing, it is the view of Kreuger’s group that the 36 percent interest rate cap would for all practical purposes serve as a ban on these businesses. Rather than precipitating a trickle of store closures at the margins, what we would see would be a wave of closures beginning the day after the law took effect, she said.

For those of us who regard payday lending as predatory, this is more a feature than a bug. But it is worth being honest about what the bill’s impact would be.

Kreuger also argued that since the lenders make short-term loans, it is unfair to characterize the loans using calculations of annual percentage rates. The APR may clock in at 525 percent for a typical payday loan, but all that means is that the product is not designed with a year’s worth of fees in mind, and APR is not a fair measure of what is being charged, she said.

Well, OK. But however you define it, a $20 fee on a $100 loan seems awfully high.

“For individuals who are cash-strapped or who need (a short-term loan),” Kreuger said, “some use bouncing checks as a method of convenience lending. There’s a fee applied to that, and that’s something they’re willing to pay for.”

Compared to fees for bouncing checks, Kreuger argued that payday loans could be a more rational option. This may be true. But it is odd to say that consumers must either choose outrageously high payday-lending fees or else outrageously high bounced-check fees. To the extent that consumers use bounced checks as a form of short-term loan, they shouldn’t. Rather than being an argument in favor of payday lenders, this is a symptom of the same problems, which is that many people do not live within their means.

This can happen for many reasons. While almost all households experience tight times, the great majority of consumers of payday loans are repeat users — meaning the payday lenders are not being used in a crisis, but as a normal way of managing their cash flow.

This can be a sign that someone is struggling, or living at the poverty level. Very often, though, it’s a sign of someone who doesn’t have the financial skills or the discipline to manage his or her cash flow.

There is some evidence to suggest that where payday loans are not available, consumers turn to other forms of credit. A 2008 study by an economist at the Federal Reserve Bank of New York that studied the effects of payday-lending interest-rate caps in Georgia and North Carolina found that bounced checks did increase.

It simply isn’t good enough, though, to argue that payday loans are not the worst possible option for consumers short on cash. They are a symptom of a larger problem, that is true. But even a doctor will tell you that sometimes you have to treat the symptoms before you can treat the cause.

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