Thursday, June 2, 2016

Payday Loans

I read an article this am about how PayDay loans were now going to have to adhere to lower interest rates. One of the arguments for these new regulations is that the industry was making great profits at the expense of those unfortunate people who aren’t “making ends meet.”

If this were such a profitable business, I wonder why new companies don’t come in and offer the same services at a lower rate. I suspect they don’t because it isn’t such a great business. Many of these loans are never paid.

I had a student once who had a choice of a “like new” camera at $100 at the Click Shop, or a $250 camera at Best Buy with a high interest rate credit card. He bought the $250 camera, which probably cost him $350 if it was ever paid for completely.

Fortunately I’ve never been in that situation. It is unfortunate to have to be there. Yet what is the solution? What was solved with the regulation?

The Payday loan industry claims that where the average store would have a yearly profit of $37,000 now they will have a loss of $28,000. So the regulation worked against the industry. Perhaps there will be no more Payday loan stores. What this means is that more cars will be repossessed and more people will not be able to pay rent.

I think this may be one of those situations where we were correct in identifying a problem but not correct in identifying a solution. I suspect that few will benefit from this regulation and many will suffer, from the industry to the individuals.

What are the solutions?
Education, for one. Many adults, including some with a college degree, can’t figure out how much 17% of $250 is.  
Education too on how to live on a limited budget.
And a host of other initiatives are possible. The obvious one might not be the right one.
4. Obama administration unveiling new rules on payday loans
The Obama administration is expected on Thursday to unveil federal rules to extend federal oversight to the $38.5 billion payday lending industry. The rules proposed by the Consumer Financial Protection Bureau would require lenders to assess a borrower’s ability to repay, and discourage rolling over loans, which can pile up lending fees. Lenders say the new rules, now opening up for public comment, would gut the industry. Consumer advocates say the rules are necessary to protect borrowers who can be ruined by loans with effective interest rates that can exceed 390 percent. —From This Week, a online (and paper) news service.

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