Friday, July 16, 2010

Steven Horwitz on Payday Lenders

A very good essay on the unintended (well, maybe, unintended) consequences of the new payday lending price cap in Arizona.
As Horwitz points out, following a helpful discussion of the 'interest rates' the lenders charge (I have raved in the past about how misleading the numbers involved are) there is a real question about the usefulness of such a law.
But who exactly is hurt here? No one points a gun at the heads of the borrowers. Clearly they perceive a need for that additional liquidity and, to use a little economic jargon, their time preference is high enough that they are willing to pay the high rate for the very short-term loan. Their willingness to do so is most likely a consequence of their poverty; they lack the assets and collateral, and even the human capital, necessary to get a standard loan or a credit card. For such people the payday loan option is better than going hungry between paychecks.
He finishes with an interesting speculation about theintended consequences:
Ironically, the law will probably be praised by those on the left who have (rightly) criticized Arizona’s crackdown on illegal immigration. It’s ironic because research shows that payday lenders are most commonly found in areas with high immigrant populations, such as Arizona, suggesting that immigrants, legal and otherwise, are a large part of their customer base. Without citizenship and the relevant ID, and with limited economic assets, they likely have only one borrowing option. Pushing these lenders out of the state is completely consistent with the state’s anti-immigrant bias. Rather than preying on immigrants and the poor, payday lenders offer them a service that would otherwise be unavailable. Sending them packing makes Arizona that much more inhospitable to people seeking freedom and opportunity in the United States. The leftists who claim to support immigrants, illegal or otherwise, but who praise this law need to see the harm it will do.
What’s really undefendable are not the loan sharks and payday lenders but the politicians who callously deny the poorest among us access to credit that might enable them to put another few meals on the table or buy medicine for their kids now rather than later. We should be closing down the Arizona state legislature not the payday lenders.
Well we cannot really carry out that last recommendation but we certainly do not have to praise them for this ill-conceived law.


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