There was a time when activism highlighted the disaster of high interest payday loans and doorstep lending. As we and others pointed out this is simply an inherently expensive thing to do:
Competition seems to limit payday lenders’ profits as well as their prices. This study and this study found that risk-adjusted returns at publicly traded payday loan companies were comparable to other financial firms. An FDIC study using payday store-level data concluded “that fixed operating costs and loan loss rates do justify a large part of the high APRs charged.”
Is a 36 Percent Interest Cap in Order?
Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researchers treat a 36 percent cap as an outright ban.
That’s the American experience but limitations were placed on what could be charged here and Wonga and others left the business. Provident Financial is now also leaving. From those who demanded this change we now get a new insistence:
I continue to have little regard for the business model of financiers like Provident Financial. But there is a problem now they and Wonga have left the market, and that is in some people accessing credit at all.
It is vital that those on low income with low or no savings have access to credit.
Small sum and short term credit is simply an expensive thing to provide. Parts of Goodwill in the US tried to do it on an entirely non-profit basis and had to charge 200% APR just to balance those books.
But this is how the activist gravy train works. Demand the abolition of short term small sum credit then once achieved, demand the creation of a small sum short term credit industry.
A little advice on what we think would make a better world. Why not come up with the solution first? Create the better system then compete the old out of business instead of using the law to ban. On the basis that people might really need the goods or services on offer. Depriving people of what they need is not quite the way to do things now, is it?
This content was originally published here.