Protecting the poor with no credit history from predatory lending is a decent thing to do. But how far should we go to restrict access to money proclaiming that we always know what’s best for them?
Should we keep prohibiting companies from lending to cash-strapped people who otherwise can’t get a conventional line of credit?
The fight over these types of high-interest loans -- often called payday lending -- pits free-market principles against socially minded advocates who see the industry as wicked and immoral.
Support for the industry has declined across the nation, given the restrictions imposed in some states, but the fight for a comeback resurfaced in Arizona this week.
What Lawmakers Are Proposing
Republican state lawmakers are once again proposing legislation permitting payday lending but this time are suggesting capping a line of credit at $2,500, which must be paid off in a year. Using a legislative maneuver known as strike-everything amendment, lawmakers pushed through House Bill 2496, which would allow lenders to charge borrowers a daily “transaction fee” of 0.45 percent or about 164 percent annually.
Arizonans in 2008 joined the crusade against payday lending, banning exorbitant charges and capping interest rates at 36 percent.
Now, 38 states have statutes that allow payday loans and 11 jurisdictions prohibit or cap interest rates, including Massachusetts, New Jersey and Pennsylvania, according to the National Conference of State Legislatures.
Critics say these types of loans trap the most vulnerable into paying exorbitant fees, plunging them into worse financial chaos. Supporters such as Republican Sen. John Kavanagh argue it is credit cards and student loans, not payday loans, that are the debts choking Americans. Meanwhile, Sen. Debbie Lesko emphasized the need for quick cash.
Which side is right? Both are to a certain extent.
For instance, there is no dispute of the need of access to loans – the supply and demand of a free-market society.
The disagreement is what to do about the short-term need for cash and how stringent government regulations should be.
Don't Forget Those Caught In The Middle
Caught in the middle of this sociopolitical debate are real people desperate for cash. Many of these folks live below the poverty level – those earning roughly $24,000 annually for a family of four. Some have poor or no credit history and have dried up all other alternatives, including turning to family members for help.
Is 164 percent annual interest exorbitant? Of course, but you also need to consider the risks lenders take. The sooner a borrower pays off the debt, just as with credit-card debt, the less money she or he pays in fees. Would you lend a few hundred bucks to a stranger with no credit history and no collateral? I bet the answer is no.
The Atlantic, in an exhaustive article published in May 2016, examined the far-reaching payday-lending industry and found that it serves more than 19 million Americans, with a typical borrower being a white woman between the age of 25 and 44.
The Pew Charitable Trusts estimated in 2013 that 12 million Americans take out small loans each year, while the non-profit Mission Asset Fund indicates that 64 million consumers don’t have a credit score and that 17 million don’t have access to a bank account.
I understand the need for some sort of regulation to protect the poor from lenders who prey on them to make a sizable profit. But we must not disregard personal responsibility either. We must not act as the almighty who always knows best or patronize people just because of their economic status.
A Better Way Out Of Our Borrowing Problem
This is a crisis of enormous proportions. The root of the problem is poverty, lack of education in general and financial literacy in particular.
Is payday lending the ideal solution? No. But neither is getting rid of the option entirely – not until more people are lifted out of the financial shadows.
The solutions are complex. We can agree on overarching ideas: Let people decide for themselves, aggressively provide them with financial information and begin formalizing personal lending.
The work of Mission Asset Fund, which facilitates lending circles – people borrowing from each other – is a good idea.
Lending circles work like this: A group of say 12 people decide to do a lending circle. Each participant pays $50 a month. And each month someone takes out $600 until everyone has had a turn. Mission Asset Fund reports the $50 payment to credit reporting bureaus.
The participants have the bulk cash. And, they are accountable to the other 11 people, said Phoenix attorney Jim Barton, who is trying to work with his congregation at Chalice Christian Church in Gilbert to establish one of these lending circles.
“It’s a cool system,’’ he said. “(But) There are limitations to it, particularly if you have an emergency and it’s not your turn.”
The church’s pastor, the Rev. Abigail Conley, said lending circles have been successful in developing countries and the people who have benefited the most are those with no credit history, immigrants and victims of domestic violence.
“We want to break the cycle of poverty,” Conley said.
READ ORIGINAL ARTICLE
Protecting the poor with no credit history from predatory lending is a decent thing to do. But how far should we go to restrict access to money proclaiming that we always know what’s best for them?
Should we keep prohibiting companies from lending to cash-strapped people who otherwise can’t get a conventional line of credit?
The fight over these types of high-interest loans -- often called payday lending -- pits free-market principles against socially minded advocates who see the industry as wicked and immoral.
Support for the industry has declined across the nation, given the restrictions imposed in some states, but the fight for a comeback resurfaced in Arizona this week.
What Lawmakers Are Proposing
Republican state lawmakers are once again proposing legislation permitting payday lending but this time are suggesting capping a line of credit at $2,500, which must be paid off in a year. Using a legislative maneuver known as strike-everything amendment, lawmakers pushed through House Bill 2496, which would allow lenders to charge borrowers a daily “transaction fee” of 0.45 percent or about 164 percent annually.
Arizonans in 2008 joined the crusade against payday lending, banning exorbitant charges and capping interest rates at 36 percent.
Now, 38 states have statutes that allow payday loans and 11 jurisdictions prohibit or cap interest rates, including Massachusetts, New Jersey and Pennsylvania, according to the National Conference of State Legislatures.
Critics say these types of loans trap the most vulnerable into paying exorbitant fees, plunging them into worse financial chaos. Supporters such as Republican Sen. John Kavanagh argue it is credit cards and student loans, not payday loans, that are the debts choking Americans. Meanwhile, Sen. Debbie Lesko emphasized the need for quick cash.
Which side is right? Both are to a certain extent.
For instance, there is no dispute of the need of access to loans – the supply and demand of a free-market society.
The disagreement is what to do about the short-term need for cash and how stringent government regulations should be.
Don't Forget Those Caught In The Middle
Caught in the middle of this sociopolitical debate are real people desperate for cash. Many of these folks live below the poverty level – those earning roughly $24,000 annually for a family of four. Some have poor or no credit history and have dried up all other alternatives, including turning to family members for help.
Is 164 percent annual interest exorbitant? Of course, but you also need to consider the risks lenders take. The sooner a borrower pays off the debt, just as with credit-card debt, the less money she or he pays in fees. Would you lend a few hundred bucks to a stranger with no credit history and no collateral? I bet the answer is no.
The Atlantic, in an exhaustive article published in May 2016, examined the far-reaching payday-lending industry and found that it serves more than 19 million Americans, with a typical borrower being a white woman between the age of 25 and 44.
The Pew Charitable Trusts estimated in 2013 that 12 million Americans take out small loans each year, while the non-profit Mission Asset Fund indicates that 64 million consumers don’t have a credit score and that 17 million don’t have access to a bank account.
I understand the need for some sort of regulation to protect the poor from lenders who prey on them to make a sizable profit. But we must not disregard personal responsibility either. We must not act as the almighty who always knows best or patronize people just because of their economic status.
A Better Way Out Of Our Borrowing Problem
This is a crisis of enormous proportions. The root of the problem is poverty, lack of education in general and financial literacy in particular.
Is payday lending the ideal solution? No. But neither is getting rid of the option entirely – not until more people are lifted out of the financial shadows.
The solutions are complex. We can agree on overarching ideas: Let people decide for themselves, aggressively provide them with financial information and begin formalizing personal lending.
The work of Mission Asset Fund, which facilitates lending circles – people borrowing from each other – is a good idea.
Lending circles work like this: A group of say 12 people decide to do a lending circle. Each participant pays $50 a month. And each month someone takes out $600 until everyone has had a turn. Mission Asset Fund reports the $50 payment to credit reporting bureaus.
The participants have the bulk cash. And, they are accountable to the other 11 people, said Phoenix attorney Jim Barton, who is trying to work with his congregation at Chalice Christian Church in Gilbert to establish one of these lending circles.
“It’s a cool system,’’ he said. “(But) There are limitations to it, particularly if you have an emergency and it’s not your turn.”
The church’s pastor, the Rev. Abigail Conley, said lending circles have been successful in developing countries and the people who have benefited the most are those with no credit history, immigrants and victims of domestic violence.
“We want to break the cycle of poverty,” Conley said.
READ ORIGINAL ARTICLE