However, they aren’t interested and haven’t been for decades – banks don’t want to lend because they can make much more money with larger loans to wealthier borrowers
Each week, In Theory takes on a big idea in the news and explores it from a range of perspectives. This week we’re talking about payday lending. Need a primer? Catch up here.
Mehrsa Baradaran is the J. Alton Hosch Associate Professor of Law at the University of Georgia School of Law and author of “How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy.”
A public interest lawyer once explained that “poverty creates an abrasive interface with society; the poor are always bumping into sharp legal things.” Indeed, the poor are also constantly bumping into sharp financial things.
Without a financial cushion, every mistake, unexpected problem or minor life change can quickly turn into a financial disaster. Half of the U. The reality is that people need short-term loans and we have to find a way to provide credit that is safe and accessible.
This month, the Consumer Financial Protection Bureau proposed new rules to blunt some of the sharpest edges of the payday industry. Up until now, regulating the shark-like behavior of these lenders has been a state-by-state endeavor, and looked a lot like a cat and mouse game. A state would ban payday lending, and the industry would shift to title loans. Or one state would cap interest rates, and the lenders would migrate to states with very high or no interest rate gaps and lend back into that state. The CFPB rules could end all of that: this cat has federal jurisdiction and there aren’t many places to hide from its reach.
This is why a lot of payday lenders claim that these rules will wipe out the entire industry, which offers an essential service to their clients who are better off with access to these loans.
This is not entirely true: These loans do not make customers better off. Many stay indebted for months or even years and most pay interest rates of between 300 to 2,000 percent. By the time they’ve paid off the loan, they are further in the hole than when they started.
S. population has less than $500 in savings , living paycheck to paycheck and sometimes relying on payday lenders in a pinch
But are these loans an essential service for poor borrowers? Yes. Most people assume that with some education and better money management, the poor would not need such ruinous loans. Thus, the argument goes, it’s fine for a paternalistic state to forbid them to protect the borrowers from their own mistakes. But this view ignores the reality of poverty and all of its sharp edges.
These loans offer liquidity – a financial lifesaver – when those living on the financial Get More Info edge bump against an unexpected problem. Most of us rely on loans to get by or to get ahead. The poor also need loans, but usually just to stay afloat. So if we are going to regulate them away, the next step has to be providing an alternative.
One option would be to persuade banks to do it – after all, they are the institutions primarily responsible for lending. In fact, as I show in my book, “ How the Other Half Banks ,” payday lending is a fairly recent phenomenon that has ballooned to fill a void created by banks. Instead, after researching this industry and all the possible options, the one that seemed most promising was to create a public option in banking for the poor.