By Ed Duffy
House bill 1310 would cap interest rates by Payday lenders at 45% per year while also putting a limit of $60 per 12 month period on origination fees.
A Payday loan is a small loan, usually between $300 and $500. Typically these loans are made to people who have little or no other access to credit and feel they have no alternative. They can carry effective interest rates as high as 350% or more. Many borrowers continually roll over their loans and can wind up trapped in a perpetual cycle of ever increasing debt.
Some argue that capping interest rates and fees is anti-free market. In most cases I would wholeheartedly agree. In this particular situation though, the practice of ridiculously high fees and interest rates is extremely predatory. It takes advantage of people who are not aware that they would be much better off simply not paying their bills and facing the consequences of that, whether it be late fees or even eviction. The result would be to force them to correct their budgets rather than to enter into indentured servitude.
On the other hand, these types of lenders serve a very high risk market. They make emergency loans available to people who couldn't get them anywhere else. If someone chooses to pay an exhorbatant fee for a short term loan, should we assume it's because they're stupid or should they be free to make that choice?
A better option, consistent with free-market principals would be an effort to educate people about finances and alternatives. Maybe more practical economics in public school and less "sensativity training".
The ignorance in economics is not limited to the impoverished. Look at the popularity of "factoring". This is the practice of lending money based on a business' future revenue, often from credit card sales. If you do the math on these set-ups you'll find business owners paying rates of 60% or more for loans extending 6-7 months. Of course you'd be better off just swiping your own credit card, even if it's a high rate one. You could also just have a "super sale" to raise revenue. For example if your mark-up normally gives you a 50% margin and you drop it to 20% for your sale, you're still only giving up half of what you would in a factoring deal and your generating traffic at the same time.
Protecting people from overpaying for services is not the government's job, but as long as we're paying for public education, combating ignorance is.
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