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No, Seriously, You aren’t protecting consumers by denying them a choice
I have previously mentioned, in the context of online marketplace lending, that efforts to protect consumers by denying them access to…
I have previously mentioned, in the context of online marketplace lending, that efforts to protect consumers by denying them access to their preferred financial services is counterproductive. This piece, by KSFY, the Sioux Falls, South Dakota ABC affiliate, presents another frustrating example of the costs of paternalism.
Last November South Dakota voters imposed a 36% APR rate cap on short term loans. Unsurprisingly that drove short term lenders out of the state. How did that impact people who used those services? KSFY asked Steve Hildebrand, leader of South Dakotans for Responsible Lending, the group that pushed the cap. He was happy that the payday lenders were no longer “infecting” the local community. But what about the people who used those products, what are they doing? Well, according to Hildebrand:
“They’re [the former borrowers] looking at other ways to do it [making ends meet] — getting a second job, looking at any alternative but to borrow money at 574%,”
Importantly, Hildebrand didn’t say borrowers were finding loans at 36% APR, nor that they were getting low interest credit cards. He said that consumers were getting a second job. I hope there is a second job out there for everyone who needs one. I also hope these borrowers didn’t have families they wanted to spend time with, school, hobbies, interests, or anything else they preferred to do with their lives other than working a second job.
It is important to remember that the option to get a second job instead of taking out a loan was already available. If you didn’t want to take out a payday loan you could always get (or at least try to get) a second job. I’m sure many people did that, and that is great. If it made more sense for the would-be borrower to take a second job that is absolutely what they should do. But it was the borrower’s choice, based on what the borrower determined was in his or her best interest. Now, not so much.
Now, thanks to the new rate cap, South Dakotans who previously felt that a payday loan was their best choice need to go to the next worst option. One option that supporters of the 36% APR cap do not approve of is going to an internet lender. Instead they recommend things like the second job, charity (an option that Breck Miller of Lutheran Social Services Center recommends) government support, or credit unions. It is important to remember that all of these options existed already. It is also important to remember that charities, credit unions, and the government do not have unlimited funds and will need to either ration help or take risk into account when making lending decisions.
Dignity and convenience are not just the prerogatives of the affluent
Have you ever ordered delivery food instead of cooking from scratch? Have you ever carried a balance on a credit card rather than getting a second job or working overtime to clear it in a month? Have you ever spent money or taken on debt to avoid having to ask for help? Yes, you have. Guess what, you paid money for convenience and/or dignity.
Why shouldn’t the poor be allowed to do the same? If they wish to take a short term loan instead of getting a second job or having to get charity why shouldn’t they have that ability? They are adults, they are equal citizens, and they are in the best position to assess their needs.
If there is concern that people don’t have enough information to do that assessment, if the worry is that people don’t know what they are getting themselves into, then enhanced education or greater disclosure requirements may be justified. If there is a risk of fraud then the government absolutely should step in to punish fraudsters, but simply depriving people of options, and the autonomy to make their own decisions, is not helping them.
This isn’t to say that there is anything sacred about payday lending. There isn’t. Payday, like any other financial service, is only a means to an end. If something better comes along that people wish to use instead we should not shed a tear for the payday lenders driven out of business. But that would be people themselves choosing what is best for them, not well-meaning but counterproductive paternalism. If we want to help people we should create a regulatory environment where that new better service can exist, not limit people’s existing options.
One final note
Inexplicably, the report didn’t include an interview with anyone who had used payday lending about whether they felt they were better or worse off after the law changed. I guess they were all busy at their second jobs.