Outrage is easy, and outrage is warranted-but maybe payday lenders shouldn’t be its main target
Perhaps a solution of sorts-something that is better, but not perfect-could come from more-modest reforms to the payday-lending industry, rather than attempts to transform it. There is some evidence that smart regulation can improve the business for both lenders and consumers. In 2010, Colorado reformed its payday-lending industry by reducing the permissible fees, extending the minimum term of a loan to six months, and requiring that a loan be repayable over time, instead of coming due all at once. Pew reports that half of the payday stores in Colorado closed, but each remaining store almost doubled its customer volume, and now payday borrowers are paying 42 percent less in fees and defaulting less frequently, with no reduction in access to credit. “There’s been a debate for 20 years about whether to allow payday lending or not,” says Pew’s Alex Horowitz. “Colorado demonstrates it can be much, much better.”
Maybe that’s about as good as it gets on the fringe. The problem isn’t just that people who desperately need a $350 loan can’t get it at an affordable rate, but that a growing number of people need that loan in the first place.
Ham recognized a key truth about small, short-term loans: They are expensive for lenders to make
The idea that interest rates should have limits goes back to the beginning of civilization. Even before money was invented, the early Babylonians set a ceiling on how much grain could be paid in interest, according to Christopher Peterson, a law professor at the University of Utah and a senior adviser at the Consumer Financial Protection Bureau: They recognized the pernicious effects of trapping a family with debt that could not be paid back. (more…)