Too many policies with noble intentions end up hurting the very Americans they are supposed to be helping. For a prime example, look no further than the November ballot. Initiative 428 would place a government-imposed price control on the level of interest that lenders are allowed to charge borrowers on a short-term “payday” loan. This is an onerous rule that is more likely to decimate credit markets for Nebraskans in desperate need of a small, quick loan.
Initiative 428 prohibits lenders from charging an interest rate in excess of 36%, imposes new restrictions on fees, and limits the ability for lenders to advertise to customers. Small dollar lenders tend to help rather than hurt the people they serve. According to Pew Charitable Trusts, “69% used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; and 16% dealt with an unexpected expense, such as a car repair or emergency medical expense.” Small-dollar credit products help them deal with everyday household expenses and that unforeseen emergency that can happen to anyone from any income level.
Unfortunately, special-interest groups that claim to be consumer advocates have been presenting misleading information on this issue. Nebraskans for Responsible Lending, for example, purports to be a pro-consumer group pushing Initiative 428. NRL claims that more regulations on Nebraska’s short-term lending industry will “protect families, but it will only hinder access to credit markets for Nebraskans of all income levels.
NRL views small dollar short-term lenders as predatory institutions whose sole purpose is to keep their customers in an endless cycle of debt. They like to mislead the public by pointing to high Annual Percentage Rates (APR) — which are simply the rate of interest a borrower will pay over the course of a year due to compounding — as their evidence.
For example, NRL claims that “Payday lenders prey on vulnerable Nebraska families, taking advantage of them by charging interest rates that average 404% annual interest — and in some cases go as high as 461%. Marketed as a short-term fix, the terms are designed to trap borrowers in a cycle of loans that cause long-term debt.”
The APR represents the actual rate of interest someone pays over the course of a year due to compounding, the process whereby interest is added to unpaid principal. Short-term loans act as a cash advance that are paid back in full at the borrower’s next pay period. So while the loans may indeed carry a high APR, the vast majority of loans are paid back in a matter of weeks or months, not extended for an entire year. Using the APR to indict the entire system is entirely meritless.
A 36% APR cap would be detrimental to consumer credit markets. As any individual who has taken Economics 101 knows, government-imposed price controls do not work. Whether placed on gasoline, banking interchange fees, or prescription drugs, setting price controls at below-market rates historically leads to shortages, squeezes the cost bubble toward some other portion of the economy, and imposes a deadweight cost on society.
Capping rates also interferes with a lender’s ability to judge borrowers who may be creditworthy, or credit unworthy. To that end, interest rates are incredibly important for lenders, as it allows them to price in all their fixed and unforeseen costs. Factors such as the lender’s costs and risks, the institution’s desire for profit, and consumer demand for credit all affect how expensive or inexpensive credit will be. Any short-term interest rate includes many financial factors, such as a borrower’s risk of default and fixed costs of operating a business.
This reality, coupled with the fact that 50% of low-income families aren’t able to afford a $400 emergency expense, demonstrates that having ready access to providers of immediate credit could be life-saving. Throw in a pandemic that has lowered incomes for 33% of Americans and more people than ever could need a cash advance. The choice for these consumers is often between using small-dollar credit products and being unable to cover bills or unexpected expenses.
Should Initiative 428 be approved, life could get harder for those in need of quick credit. So voters beware: Just because activists market Initiative 428 as a pro-consumer measure doesn’t mean that it is. Every policy has consequences, both intended and unintended. Payday lenders may get a bad reputation, but a world without them will be costly — particularly for lower-income Nebraskans who could experience “credit deserts” when they encounter financial emergencies.
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Too many policies with noble intentions end up hurting the very Americans they are supposed to be helping. For a prime example, look no further than the November ballot. Initiative 428 would place a government-imposed price control on the level of interest that lenders are allowed to charge borrowers on a short-term “payday” loan. This is an onerous rule that is more likely to decimate credit markets for Nebraskans in desperate need of a small, quick loan.
Initiative 428 prohibits lenders from charging an interest rate in excess of 36%, imposes new restrictions on fees, and limits the ability for lenders to advertise to customers. Small dollar lenders tend to help rather than hurt the people they serve. According to Pew Charitable Trusts, “69% used it to cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food; and 16% dealt with an unexpected expense, such as a car repair or emergency medical expense.” Small-dollar credit products help them deal with everyday household expenses and that unforeseen emergency that can happen to anyone from any income level.
Unfortunately, special-interest groups that claim to be consumer advocates have been presenting misleading information on this issue. Nebraskans for Responsible Lending, for example, purports to be a pro-consumer group pushing Initiative 428. NRL claims that more regulations on Nebraska’s short-term lending industry will “protect families, but it will only hinder access to credit markets for Nebraskans of all income levels.
NRL views small dollar short-term lenders as predatory institutions whose sole purpose is to keep their customers in an endless cycle of debt. They like to mislead the public by pointing to high Annual Percentage Rates (APR) — which are simply the rate of interest a borrower will pay over the course of a year due to compounding — as their evidence.
For example, NRL claims that “Payday lenders prey on vulnerable Nebraska families, taking advantage of them by charging interest rates that average 404% annual interest — and in some cases go as high as 461%. Marketed as a short-term fix, the terms are designed to trap borrowers in a cycle of loans that cause long-term debt.”
The APR represents the actual rate of interest someone pays over the course of a year due to compounding, the process whereby interest is added to unpaid principal. Short-term loans act as a cash advance that are paid back in full at the borrower’s next pay period. So while the loans may indeed carry a high APR, the vast majority of loans are paid back in a matter of weeks or months, not extended for an entire year. Using the APR to indict the entire system is entirely meritless.
A 36% APR cap would be detrimental to consumer credit markets. As any individual who has taken Economics 101 knows, government-imposed price controls do not work. Whether placed on gasoline, banking interchange fees, or prescription drugs, setting price controls at below-market rates historically leads to shortages, squeezes the cost bubble toward some other portion of the economy, and imposes a deadweight cost on society.
Capping rates also interferes with a lender’s ability to judge borrowers who may be creditworthy, or credit unworthy. To that end, interest rates are incredibly important for lenders, as it allows them to price in all their fixed and unforeseen costs. Factors such as the lender’s costs and risks, the institution’s desire for profit, and consumer demand for credit all affect how expensive or inexpensive credit will be. Any short-term interest rate includes many financial factors, such as a borrower’s risk of default and fixed costs of operating a business.
This reality, coupled with the fact that 50% of low-income families aren’t able to afford a $400 emergency expense, demonstrates that having ready access to providers of immediate credit could be life-saving. Throw in a pandemic that has lowered incomes for 33% of Americans and more people than ever could need a cash advance. The choice for these consumers is often between using small-dollar credit products and being unable to cover bills or unexpected expenses.
Should Initiative 428 be approved, life could get harder for those in need of quick credit. So voters beware: Just because activists market Initiative 428 as a pro-consumer measure doesn’t mean that it is. Every policy has consequences, both intended and unintended. Payday lenders may get a bad reputation, but a world without them will be costly — particularly for lower-income Nebraskans who could experience “credit deserts” when they encounter financial emergencies.
READ ORIGINAL ARTICLE