RSS Feed MenuSenator Kay Hagan of North Carolina currently has a plan to reduce payday lending. Her stated goal is to end it across the entire country, just as she ended it in her own state. However, the New York Federal Reserve looked into what has happened to states which have banned payday lending, and the results are decidedly negative for consumers and households. Do we really want to bring this to the entire nation?
Payday loans are small short-term loans intended to last until a person’s next paycheck. They have very high interest rates and are often used by low-income individuals. Some advocacy groups such as the Center for Responsible Lending believe that these loans pull individuals into a “debt trap”. They argue that the payday business is “built on making loans borrowers cannot afford to pay off, so that they will keep coming back and paying repeated fees on the same small amount of money borrowed.” Because of concerns like this, North Carolina and Georgia have banned payday lending.
These bans have not improved the lives of low-income individuals. The Federal Reserve Bank of New York compared the finances of households in Georgia and North Carolina with the rest of the country. They find that there was no improvement, and that personal finances were actually worse off, “Our findings will come as no surprise to observers who have noticed that payday credit, as expensive as it is, is still cheaper than a close substitute: bounced check ‘protection’ sold by credit unions and banks …the protection can be quite expensive.”
The report explained: “Georgians and North Carolinians do not seem better off since their states outlawed payday credit: they have bounced more checks, complained more about lenders and debt collectors, and have filed for Chapter 7 (“no asset”) bankruptcy at a higher rate.”
The empirical evidence does not seem to factor into Senator Hagan’s convictions. Hagan comments: “In the state Senate, I worked to pass legislation that effectively ended payday lending in North Carolina, and I hope to do the same across the country.” Currently, Senator Hagan’s Payday Lending Limitation Act has been referred to the Senate Banking Committee. It would restrict the number of payday loans that can be taken out by an individual to a maximum of six.
While reform is certainly needed to improve the opportunities for low-income individuals to have responsible access to credit, the real world experience with the consequences of Senator Hagan’s proposals should give all members of the banking committee pause.
LauraNo // May 13, 2010 at 2:26 pm
“Bounced check protection” costs how much exactly and how many people actually carry it? Sounds like a red-herring to me. If they are forced to pay for it, then this is another form of usury sounds like.
DFL // May 13, 2010 at 2:31 pm
Not only the poor very often have atrocious spending habits. Many who have good paying jobs tend to show a lack of maturity when it comes to spending. The computer geek who works for me is one. He makes $ 45,000 a year, gets free health insurance, lives in a $ 300 a month flophouse in the Adams-Morgan section of Washington and can’t save a dime. Instead, he often is borrowing from other members of the company just short of payday. I guess drink and drugs take up a large portion of his salary. Hard to believe, he is 43 years old and a college graduate. He’ll be living this way until the day he dies. What Kay Hagan proposes is meaningless to these sorts of people. They’ll always be short.
Geprodis // May 13, 2010 at 2:42 pm
“Some advocacy groups such as the Center for Responsible Lending believe that these loans pull individuals into a “debt trap”. They argue that the payday business is “built on making loans borrowers cannot afford to pay off, so that they will keep coming back and paying repeated fees on the same small amount of money borrowed.””
Exactly.
Is this article trying to imply that payday loans are good in some way?
“Currently, Senator Hagan’s Payday Lending Limitation Act has been referred to the Senate Banking Committee. It would restrict the number of payday loans that can be taken out by an individual to a
maximum of six.”
“the consequences of Senator Hagan’s proposals should give all members of the banking committee pause.”
The author of this article should give pause and attempt to form a solid argument.
Unsympathetic // May 13, 2010 at 2:44 pm
This thread is gratuitously ignorant.
Payday loans are BY DEFINITION usurious. They are nothing but an abuse. They are wholly unnecessary.
Of course the ban hasn’t notably improved anything – because the existence of payday loans didn’t improve anything in the first place. Well, other than the personal profit of the payday loan company executives, of course.
Let’s see a single example of any actual “real world consequence” of this restriction of payday loans. I’ll bet the author has absolutely nothing.
TerryF98 // May 13, 2010 at 2:44 pm
Why is Noah always so ill informed? Or just spouting Luntz lies.
Pay day loans are often usury. People fall into a trap and can’t get out. They charge excessive rates of interest and have draconian penalties for any sort of late payment.
There are credit unions to go to for poorer people. They will loan small amounts at a reasonable interest rate and with no stinging penalties for late payment.
LauraNo // May 13, 2010 at 2:46 pm
Is this article trying to imply that payday loans are good in some way?
Up is down. It makes you wonder if some people just WANT to see others suffer.
Unsympathetic // May 13, 2010 at 2:49 pm
Noah, let’s see any type of “consequence” of payday loans being shut down. You have nothing.
Of course the lack of payday loans hasn’t improved anyone’s life; that’s because payday loans never did anything useful in the first place.
The sole function of payday loans is to be usurious on the people who know the least about money. Nobody will miss them.
YuriPup // May 13, 2010 at 2:57 pm
You’re comparing apples to peach cobbler.
Your logic: because a total payday lending ban didn’t improve the situation for poor households when times were “good” (not that there really has been a good period for the poor since Carter) a partial ban now, when times are bad isn’t justified? How does one get from point A to point B?
bamboozer // May 13, 2010 at 3:44 pm
Remember the line from the T.V. series “Good Times”? “Easy Credit Rip Offs”, well thats Pay Day Loans. How anyone can defend these sharks is beyond comprehension.
elh // May 13, 2010 at 4:00 pm
I have to agree, the argument here is weak. Just because the material conditions of the poor were not improved by an end to payday loans in certain states does not mean payday loans are good and ought to be retained. If the metric for “improved material conditions” is that people are allowed to put themselves in hock to loan sharks in order to avert bankruptcy, I think the only person better off is the loan shark.
Conservatism has to mean something more than people’s wallets getting fatter. There’s a moral/spiritual side, too, which says (among other things) that people’s lives aren’t improved by persistent crushing debt burdens. Sometimes financial freedom in a slightly poorer condition is of greater value than servitude with a little more pocket money.
Krom // May 13, 2010 at 4:22 pm
Very low income individuals have plenty of problems, and highly predatory lending practices can only add to those. There’s an easy solution to writing a check that’s going to bounce: Don’t write the check. Find other ways to pare down expenses, or find other sources of income. Contrarily, there’s no easy solution to being under a mountain of impossible debt.
If you have any genuine concern for the poor (I suspect this article stems instead from veiled concern for lenders), then you should look for alternatives to providing assistance to them.
Dukakis in a Tank // May 13, 2010 at 4:46 pm
A higher rate of Chapter 7 filing does not show that low-income individuals are worse off. It’s called Bankruptcy PROTECTION for a reason. If the ban on payday lending means that more people who were already on the brink of insolvency have taken advantage of the Bankruptcy Code and received their fresh start, then I think that’s a good thing.
Now, that consumers are resorting to products like overdraft protection is not a good sign. This is just another example of why we need comprehensive reform of consumer lending, not a piecemeal approach that only targets certain actors.
Krom // May 13, 2010 at 5:03 pm
I should add that I think the title given to this article, in the context of the content of this article, is sensationalist at best. If FF is hoping to be a middle ground of discussion between the right and left, foolish tripe like this isn’t the way to do it.
balconesfault // May 13, 2010 at 6:09 pm
You know what also slams the poor?
Not being able to sell oneself off into slavery. Just think what a boon that could be to many of our destitute families.
samgilbert // May 13, 2010 at 8:33 pm
I’m torn. I hate payday lending and think it’s good for no one. The argument put forward by the industry is ridiculous – the poor need access to more high interest credit like they need a hole in the head. On the other hand, it is disingenuous to go after payday lenders and not go after the overdraft charges by banks at the same time. I think if we were to just leave payday lending alone, bigger players like Walmart or 7-eleven could enter the market and put the more predatory ones out of business anyway.
AMurphy // May 13, 2010 at 8:46 pm
With “friends” like Payday, the poor don’t need any enemies
rbottoms // May 13, 2010 at 8:49 pm
Payday lenders are the lowest scum sucking bastards GOP anything goes economics has produced. Worse than loansharks because they have the law on their side.
Anyone who would defend these leeches deserve a chair in Hell.
COProgressive // May 13, 2010 at 9:24 pm
Noah wrote;
“However, the New York Federal Reserve looked into what has happened to states which have banned payday lending,”
Which begs the question, “Why is the New York Reserve looking into the Payday loan business?”
The answer is banks are eyeing this industry and it huge profit potential and don’t want any regulation which would have an effect on the possible bottom lines.
Payday loans, credit card fees and bank fees are just usury. The financial industry, especially the unregulated financial industry, are trying to squeeze every last dime out of you and I, every last dime however they can. Regulate them out of business.
STET – Security Transaction Excise Tax – 0.25% on the value of each Wall Street Transaction!
Twenty five cents per $100, $2,500 per Million dollars. Wall Street can afford it, America needs it! b>
mitch52 // May 14, 2010 at 2:29 pm
This article is rediculous. I have personally been involved in having to rescue (and that is the correct word) someone from payday loan hell and for this author to pretend that payday loans are a “helping hand” to the po0r is borderline criminal. The person I know borrowed $600 and was on the hook to pay $4,275 on an annual basis (over 700% interest) to retire the debt. You try paying that back when you are making a few hundred a week. In my state (Illinois) there is a payday loan store on every corner, I dont imagine that this is because they are so anxious to serve the poor. People howl about 20% credit card interest but 710% is okay for the porrest of the poor. The study you mention sounds rediculous, lets see the link to it. The New York Fed did a study on the effect of payday loans? Show it to me. And just because banks rip people off on overdraft protection does not make ripping people off in any other way ok. Can’t these thieves make money at 50% interest rates. And heres an novel idea, maybe if you are dead poor you shouldnt have acces to credit.
Slide // May 15, 2010 at 4:45 pm
We had a paycheck loan guy in my old neighborhood. His name was Vinnie “icepick” Costanza. I don’t know what the fuss is all about? Everyone paid back their loan. Well… except for Carlo “nine finger” Alonzo.
BadAtkins // May 21, 2010 at 1:31 pm
The government has to save face. It has proven time and again that it can not get tough on Wall Street or any other multinational corporate interest. All they can do is come down on us, the American people in the name of “consumer protection”. Will Goldman or BP get justice for their atrocities? No. But we will see more rules and controls over our own daily lives instead.