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