The conservative perspective on payday loans

Payday loans can be an instructive topic since we’ll be able to discuss the difference between the conservative and liberal approach. Liberals may point out moral objections and struggle with logic, while conservatives may take a more logical approach while struggling with the moral aspects.

In reality, my conservative approach really is the moral approach. You may think that heartless, but the decisions we make today concerning the regulation of these programs – exclusively based on feelings – can have serious implications for those in future need.

As an example, let’s say you have to make a $300 car payment today, but you will not have the money to pay the debt until your next paycheck coming in two weeks. We’ll lay out two options for you.

Option 1: An offer of a $300 loan – due when you get your paycheck – that you will have to pay a $40 fee to get. (Total cost $340)

Option 2: Car repossessed tonight.

So what would you do? The penalty is high to take the loan, but loosing the car can be more of a burden. If you take the loan, you’re entering into a private contract with a financial institution who is taking an element of risk. The level of risk is what determines the fee (interest rate) that you pay. Certainly, there will be many customers who will make their payment – in this case $340 – on the due date. Unfortunately for the payday loan financial institution, some will not be able to make their payment.

The payday company is tasked to find the right balance between what they will charge for interest rates/fees and risk. If that company ends up making a 2 percent profit during a period of one year, that payday company will close. The risk is simply too high to accept a 2 percent rate of return.

If the company ends up making a 15 percent profit during a period of one year, other payday outfits would be lining up to move in across the street and offer lower rates to the customers in need, while targeting for a 10 percent profit. The company who made a higher profit margin last year will certainly need to adjust their rates – or offer a different level of service to earn those profits – or they will soon be out of business.

Competition drives the business and the interest rates/fees that are charged.

That is unless the government sticks their nose into the private transactions of individuals because they feel the need to pass feel-good legislation that screws the people they are trying to protect.

With a hat tip to Ed Morrissey at Hot Air, Volokh Conspiracy and Big Government, here’s the video from Reason.tv. Watch the full video to find out how much profit this industry is making.

Did you notice how author Gary Rivlin squirmed when asked real questions concerning what would happen if these services were not available at all? He refused to consider the implication of regulations on the industry and demanded they stick to the morality of the business. Morrissey concludes, with my emphasis in bold.

Lending regulations prior to this year would have covered issues of fraud and exploitation.  The additional regulation goes far beyond the responsible role of government in preventing that kind of violation from a neutral position to actively seeking a desired outcome from market activity, namely the destruction of a $35 billion a year industry.  It seems, at least from this report, that the government has once again failed to learn about an industry before attempting to regulate it out of existence, in the same manner ObamaCare threatens private health insurance.

Bonus Link
Head back in time to my post from Sept. 16, 2008 concerning price gouging. Although different topics, they are very similar concepts.

11 replies
  1. Linda Mae
    Linda Mae says:

    Does the word usury come to mind?  The % of interest in these are criminal.  Just read Gracie Allen's Gracie for President in 1940 skit – she makes some great comments about congress and the budget.  We have a government of checks and balances but lately it's been more checks and less balance – or soething like that.  google GA, for president.  I had hoped to find her skit on her checking account in which she complained it was wrong to let her have checks in hand while there was not money in the bank.  Sounds like our congress today.$$$$

  2. Linda Mae
    Linda Mae says:

    Does the word usury come to mind?  The % of interest in these are criminal.  Just read Gracie Allen's Gracie for President in 1940 skit – she makes some great comments about congress and the budget.  We have a government of checks and balances but lately it's been more checks and less balance – or something like that.  google GA, for president.  I had hoped to find her skit on her checking account in which she complained it was wrong to let her have checks in hand while there was not money in the bank.  Sounds like our congress today.$$$$

  3. TomTGRWolcott
    TomTGRWolcott says:

    It would seem to me that people are going to choose what is right for them.  And I want to believe that no matter how much or little one has as far as assets are concerned, that we as an individual can decide what is best for our selves.

    It seems to me that when ever government gets into the mix of things, it creates chaos.  Now I could go into reasons why Chaos is not only bad for the person who is creating it, but also why it is bad for the universe as well, but the real issue is when will government just leave us alone.

     

  4. Tim-in-Alabama
    Tim-in-Alabama says:

    The choice is between a relatively expensive loan product and no product. Pro-choice Democrats opted for no choice for the poor, or anyone else in need of cash for that matter.

  5. rickyrock
    rickyrock says:

    OK Steve so what is the intent of usury ……….why have interest limits ..the state of ct does .why not do away with that .A 15 dollar charge for a 100 dollar pay day loan for a 14 day period amounts to a 391 percent interest rate!!!! To justify this theft by saying payday loan centers take on added risk is nonsense.A more equitable rate of interest would still yield a healthy profit.I work in the sub prime business selling sub prime car loans at 18.99 % interest and they make a ton of money.There are government guide lines for a reason.Pay day loan centers hammer customers for repeat business even after they pay off their loans ……….it's a hideous parasitic business.

  6. Steve M
    Steve M says:

    @rickyrock .. ahh yes, you use the oh-my-God-that's-a-lot argument even with four exclamation points. Then you use the theft word. Pure liberal bull feathers and all emotion. Theft is when someone takes something from someone else by force. These customers enter into a business and agree to terms. I challenge you to go find out the profit margins of these operations. I'm willing to bet the video is accurate – about 10 percent over all.

    Then, if you think it's theft and you can do better, go ahead and open up a payday store yourself and undercut the competition across the street. If they are "thieves" and making profits in the "four exclamation point" range, I'm certain you can make a good living providing these customers a service at half the interest rate offered by the operation across the street. I'm certain you're not willing to put your money where your mouth is.

    After that, go visit former customers of these operations who have been legislatively knocked out of business in multiple states and find out how they are doing. Are their families who had to file bankruptcy because they no have no option for support?

    By the way, thank you for clearly showing the liberal position (I care … no matter what) as compared to the conservative view. Your comment is a perfect example.

  7. Steve M
    Steve M says:

    And it's not just the added risk incurred. There are many business operation issues to consider. This is a short-term loan, not a 15 or 30 year mortgage or even a four year car note. There is paperwork to be done, credit checks, employees to pay, and all the other normal business expenses. If you needed $100 for two weeks, how much less than $15 could be charged for this service? (Your example)

  8. Lucinda
    Lucinda says:

    Gary Rivlin can rack up thousands of dollars in credit card debt for things like food and rent (he claimed to be frugal), but the working poor, who don't have credit cards, can't get payday loans. Using Steve's example, the poor guy would lose his car, then his job (can't get there without wheels). But Gary Rivlin can feel good he saved the poor guy $40.

    Typical elitist thinking.

  9. Lucinda
    Lucinda says:

    Let's have fun with numbers!

    $100 payday loan: fee is $15 for 14 days, or about a buck a day

    $10,000 auto loan at 7% for 4 years (1461 days): interest is $1,494, or about a buck a day

    $100,000 mortgage at 5% for 30 years (10,957 days): interest is $93,256, or about $8.50 a day

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