As usual, the paternalists are making people worse off by trying to “save” them. Payday loans are expensive — not something I run off and do. But people who resort to payday loans often have to meet other obligations. Failing to do so often will cost them more.
A new study by the Federal Reserve Bank of New York makes this point. Explains the Free Library:
The study, released in November by the Federal Reserve Bank of New York, looked at two states where payday lending has been banned: Georgia and North Carolina. Authors Donald P. Morgan of the Federal Reserve and Michael R. Strain of Cornell University found that the citizens of those states bounced more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy more often. The correlation between reduced payday lending and increased credit problems, they write, “contradicts the debt trap critique of payday lending, but is consistent with the hypothesis that payday credit is preferable to substitutes such as the bounced-check ‘protection’ sold by credit unions and banks or loans from pawnshops.”
Industry critics charge that the $15 fee that payday lenders charge for a two-week $100 loan is exorbitant, amounting to 391 percent annually if the loan is rolled over for a year, accruing $15 every two weeks. The Community Financial Services Association of America, an industry group, did the math on the rates incurred with other options, and finds that a $100 bounced check garners a $54 fee, which comes out to an annual percentage rate of 1,409, and a $37 late fee on a $100 credit card balance amounts to an annual percentage rate of 965 percent. The study’s authors confirm this pattern: “Forcing households to replace costly credit with even costlier credit is bound to make them worse off.”
Message to government nannies — keep your hands off loans for the poor. You’ll only make the people worse off!