Friday, May 16, 2008

Ripping Off Working Families

"The 2005 law[Illinois] capped rates on one type of loan: short-term 'payday' loans taken out for up to 120 days are limited to 403 percent annual interest. The law also imposed protections aimed at keeping borrowers from falling into debt traps, such as limiting the number of loans to two and allowing borrowers to work out a repayment plan.

Soon after the law too effect, however, many lenders began directing borrowers to loans of 121 days or longer that did not include such safeguards, consumer advocates say."

Stephen Franklin, "Payday law loophole swallows borrowers whole." Chicago Tribune, May 12, 2008.

Is that the way it's supposed to work? Advocates of "making markets work" and market-based community development" glory in the allocative, innovative, scaling, mastery of the market's invisible hand. It's the new paradigm. Unfortunately, a lot of sleazebags are out there who take every opportunity to rip-off people.

Here's a case where we set some reasonable rules for market players. Ain't 403 percent a good deal? Not enough return, it seems.

Sure there's risk. Sure there are transaction costs. And given job volatility, wage stagnation, and consumer debt, people certainly need some short-term help. But guys, you're giving the market a bad name. Seems like you're just innovating around the rules. See: National Consumer Law Center ,and for alternatives, REAL Solutions.

Anybody have some better ideas about how to "make markets work" for low- and moderate-income consumers?


Josh said...

I've maintained for years that interest rates on short term lending should be highly regulated. The cycle of bad loans is vicious and it is designed to keep people in debt.

Austen said...

Ohio just passed a law reducing max interest rate to 28%, no more payday industry in Ohio

Josh said...

Glad to hear that, I'm from Ohio!