Congress bans short-term loans, the poor pay a high price

WAshington do-goodism almost always fails to help the people it is supposed to help because politicians ignore the law of unintended consequences. Nowhere is this more evident than when it comes to a Congressional plan to put payday lenders and other short-term lending institutions, such as burgeoning online lenders, out of business. .

These are lenders who provide last-minute or emergency loan service – typically between $ 100 and $ 600 – to most low-income Americans or those with poor credit scores. Liberal “consumer groups” and congressional liberals demonize these companies as modern day Shylocks, the infamous lender of Shakespeare’s “Merchant of Venice” who demands a pound of flesh if loans are not repaid on time .

Rep. Jesus Garcia, Democrat of Illinois, and Rep. Glenn Grothman, Republican of Wisconsin, are co-sponsors of a bill called the Veterans and Consumer Fair Credit Act (the VFCA bill has nothing to do with veterans and several veteran groups have written to complain about this ruse). It would cap interest rates on short-term and emergency loans at 36%. Critics of short-term lenders say they “target” low-income Americans and minorities. The left claims that this new law would “save” low-income Americans between $ 5 billion and $ 10 billion a year.

No one is forcing anyone to go to these stores or use online lenders. They do it because these people think it is the best and most convenient option for them. There is no shortage of customers on Thursday or Friday afternoons as workers line up to get an advance on their wages so they can have spending money for the weekend or they can pay their work bills. grocery.

It’s the same reason why tens of millions of wealthier Americans are willing to pay a $ 3.50 fee to get $ 100 cash withdrawal at an ATM – a convenience many members of Congress have. also want to ban.

The VFCA would make it illegal for a lender to provide someone with a cash advance of $ 250 and then repay the “loan” a week later with a fee of $ 10. But why? Can consenting adults not decide for themselves whether they wish to engage in this transaction? Or is it really true that the left despises the poor so much that they think their constituents are incapable of making sound decisions on a daily basis?

Perhaps it is the politicians in Washington who are financially helpless here. Well, more than half of all Americans live from paycheck to paycheck today. Often these workers have bad credit scores, so they cannot get a traditional loan or consumer credit from a bank. About one in five Americans can’t get a credit card, or if they do, the alternative to a short-term payday or online loan when scrapped for cash is to get into debt on their Visa card, which is much more expensive than the charge on a payday loan.

According to a 2019 Federal Reserve Board study, nearly 4 in 10 Americans today “don’t have the savings to cover an emergency expense of $ 400.”

For Americans embroiled in these kinds of financial difficulties, payday lenders are saviors, not demons. The $ 5 to $ 20 fee for an emergency cash loan is a small price to pay. Except many in Congress don’t think so. They complain that a $ 10 or $ 15 fee for a $ 200 loan paid off in two weeks can have an annual percentage interest rate or up to 400%. But an APR is a totally irrelevant statistic on a 10 or 14 day cash advance. The Wall Street Journal has calculated that the APR for a bad check or late payment by credit card can sometimes exceed 1,300%. Are we going to eliminate credit cards as well?

A vital street reality that consumer advocates and politicians fail to take into account is that payday and online lenders have actually helped low-income areas in a big way – they’ve largely replaced loan sharks. The interest rate on an unpaid loan shark is not a $ 10 or $ 20 fee, but a broken arm.

This says a lot about the motivation of the Fair Credit Act and its supporters that the law would exempt credit unions. These are tax-exempt institutions that are direct competitors to online payday and short-term lenders – and they would like nothing better than to drive the competition out of town – just as McDonald’s would like to shut down Burger King. Credit unions are also the main funders of many consumer interest groups that hammer payday lenders. It would therefore perhaps be too charitable to even say that VFCA supporters are primarily motivated here by a mistaken concern for the financial well-being of lower-class Americans.

But the motives don’t really matter here – the results do. Bankrupt short-term lenders, as some states have already done, and the victims are the people who can no longer use the convenience of those services that were once on the streets. There is evidence that many Americans living near a state border leave the state without a payday lender for states that do. If Representatives Garcia and Grothman are successful, the Americans will no longer even have the opportunity to do so. It is a law that only the usurer can love.

• Stephen Moore is a senior fellow at the Heritage Foundation and an economic consultant at FreeedomWorks.

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