Taking the “Predatory” Out of Lending

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Although I can’t find the offending essay, just now, some years back, I upset some people by suggesting that the attack on payday loans was taking the wrong direction by using government to shut the practice down.  As I’ve also noted, such approaches tend to address what activists see as a problem without addressing (or even seeking) the underlying incentives.  As a result they can make things worse by, for example, denying opportunity to somebody whose specific interests might actually be served by a short-term loan at very high interest.

I noticed, in particular, that while all of the activists were sure that the terms of such loans were unfair, none of them appeared interested in providing high-risk, short-term loans at better rates, whether as a better business model or by writing off any losses as charity.  If the argument is that lenders are abusing people and charging them unfair rates, given the risk, then it ought to be easy for more moral people to make a healthy profit at the same occupation; otherwise, we can’t really say that the lenders are being abusive.

I was intrigued to see, therefore, a Los Angeles Times article reprinted in the Providence Journal, this weekend, about employers setting up such programs as a benefit:

[Doug] Farry isn’t trying to shame employers into boosting wages. He’s trying to persuade them to sign up with his company, Employee Loan Solutions, a San Diego startup that works with a Minnesota bank to offer short-term loans. They carry a relatively high interest rate but are still cheaper than typical payday loans. …

That there are multiple firms in the market illustrates the size of the opportunity and the dire financial straits many workers experience. An estimated 12 million Americans use payday loans, borrowing tens of billions of dollars annually.

Even with this approach, activists are worried that the loans don’t come with enough investigation about borrowers’ ability to pay, to which the entrepreneurs point out that they’re serving customers’ needs for high-risk loans made on short notice at the lowest possible cost.  Paying for reviews of their credit will either take longer than they have to wait or cost more than they can afford to pay.

Whether any of these products is the ideal solution, I don’t know.  But in a recurring theme, of late, solutions have to begin by acknowledging that everybody involved in a transaction is a human being in unique circumstances that can’t be addressed well when activists use government to make judgments for people whom they don’t know.



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