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Follow Up on Usury Post:

I wasn't following the comments on my "In Defense of Usury" post, since it was primarily just an excerpt from Karlan and Zinman's argument. I confess that I was surprised to see that there were so many comments and so much controversy about the study described in the Wall Street Journal column. Also, I apologize for the fact that I didn't realize that we had a spam filter that would interfere with comment postings (which apparently blocks out words like "loans"--looks what happens when I hang around with a bunch of constitutional law bloggers).

Several of the commenters raised the challenge that nothwithstanding the authors' conclusions, very high interest rates are still "immoral" and should be banned. But I don't really follow the logic of the critique--if there are no externalities, and those that borrow are better off as a result, what exactly is the argument for why high interest rate loans are immoral and should be prohibited?

The whole point of the column is that under a consquentialist theory, this is socially beneficial. It also certainly seems consistent with autonomy theory. And if the borrowers are generally better off overall from this and appear to understand what they are doing, I don't understand why it would be a problem under a paternalistic theory.

I've heard this argument pronounced previously--that certain interest rates are simply "too high" and shouldn't be tolerated. I'd genuinaly like to understand--what exactly is it that supposedly makes this transaction "immoral" such that it shouldn't be allowed? What is the theory?

Moreover, as the authors suggest, those who don't get this credit often will turn to even worse forms of credit, such as pawnshops or even illegal lenders. Or as one of the commenters notes, bounce a check, which may amount to as much as $50 in penalty fees. Paige Skiba's research suggests that those who use pawnshops often are those who wanted a payday loan and were turned down for it. So eliminating payday loans will force them to use pawnbrokers. And research by Gregory Elliehausen and others suggests that those who use payday loans are often those who can't get access to a credit card or are maxxed out on the credit cards they have. And Donald Morgan has found that increased competition in the payday lending industry leads to lower prices on payday loans.

Moreover, interest rates are just one of many price terms in a credit contract. Thousands of years of economic history has demonstrated one central point--if you regulate interest rates, then lenders will try to clear the market by repricing other terms of the contract, such as requiring larger downpayments, higher fixed underwriting fees, more onerous default criteria, etc. Retail stores, by contrast, simply bury credit prices in the cost of the goods they sell then increase the costs of the goods.

So usury regulations have three predictable consequences: (1) a cap on interest rates or regulation of other terms leads to a repricing of other terms of the credit contract to try to adjust, (2) Substitution to other, less-preferred credit products such as pawnshops and loan sharks, and (3) if none of that works to clear the market, credit rationing results. I discuss this extensively in my article "The Economics of Credit Cards."

For what it is worth, Karlan and Zinman have written a number of articles applying behavioral economics to consumer credit--that's the whole hook for the article. Notwithstanding the fact that people make errors, they are still better off by having access to regulated high-priced credit. At least some of those who are unable to get access to this regulated credit will end up borrowing in the black market from illegal lenders--at much higher cost (and perhaps not just financial).

Karlan and Zinman suggest, therefore, that we should avoid policies that end up forcing consumers to deal with illegal lenders. Instead we should focus on policies that will improve the working of the legal lending market, such as improving on the current disclosure regulation scheme (as suggested by the FTC's mortgage study published this summer). That certainly seems like a more sensible approach to me.

Once all of these unintended consequences are taken into account, and assuming that consumers are sufficiently well-informed that we can draw the sort of welfare conclusions Karlan and Zinman draw, it isn't evidence to me what the theory is that justifies prohibiting these sorts of high-cost loans.

David A. Smith (mail) (www):
Very high interest rates are often a proxy for two things: (1) high default rates, and (2) very small sizes. It costs a little bit of money to originate a borrowing, and another little bit to collect it, and if those are expressed int he rate, the rate in the abstract looks very large.

A much bigger problem is that easily-accessible high-rate credit plays on some people's difficulty managing their finances. I've written about this at length on my housing-finance blog, http://dasblog.org -- search for payday lending or start at payday lending.
11.3.2007 11:07am
RL:
The reason I have a hard time with these places is that they are a form of enabling. You could make the same argument about heroin addicts who are dope sick. Give them a fix, and yes - they are "better off" . . . until they need their next fix, that is. Sometimes people just need to hit bottom.

For anyone who reads this blog, or even has access to the internet for that matter, the usury rates charged by these places ARE the bottom. But for a subsection of society with no other options, these places extend hard-working people's journey to the bottom and force them to pay tolls along the way.

As far as "immorality" goes, I personally think it's wrong to exploit others' misfortunes. But that has nothing to do with whether it should be illegal.
11.3.2007 11:17am
Dr. Weevil (mail) (www):
It's not just pawnshops. People in desperate need of short-term cash have often sold books to used-book stores, or CDs and DVDs to used-CD stores, even when they loved them enough that they went out and bought new copies when they were more prosperous. These days, eBay and Netflix are popular for that kind of thing.

All these are far worse deals than a payday loan.

I've never sold blood or volunteered for a medical experiment, but I believe you can do either of those if you're really desperate for cash.

Thirty years ago, you could write yourself a check for cash and the bank didn't check the balance if it was less than $40. In the miserable days of the Carter administration, I more than once cashed a $35 check a week before payday when I didn't have enough money in the bank to cover it. The bounce charge back then was $7, so I was paying 20% per week interest. But I needed the money for food and bus fare to the job that was the only way I would ever by able to pay back the $42, so it seemed like a pretty good deal, considering the alternatives. (Starvation and walking 7 miles to work do not go together well.) I've since been told that intentionally bouncing a check is a crime, and perhaps it was back then, but at the time the bank didn't seem to care, as long as they didn't have to wait too long for their $42. (I did have the impression that they could check the balance for checks less than $40 if they wanted to, which is why I made the amount $35 instead of $39.99. And yes, sometimes I could have gotten by with $15 or $20, but if you're going to pay a $7 charge either way, you may as well get the whole $35. Why pay 40-50% interest when you can pay 20%?)
11.3.2007 11:29am
Eapen Thampy (mail):
I tried to post a reply, but the spam filter blocked me, and it'll take me too much time to reword the post.

I'll just leave you this link.

The Wikipedia article is also fairly informative. Link here: http://en.wikipedia.org/wiki/Usury
11.3.2007 11:33am
Some Mathematician (mail):
RL: If it is wrong to exploit others misfortunes, is it wrong for doctors to make a profit off treating the sick and injured? Is it wrong for plumbers to make a profit off your broken pipes?
11.3.2007 11:35am
pete (mail) (www):
There are now non-profit pay day 1oan centers that are trying to get people to sign up there instead of at the for profit places on the theory that they can charge lower rates and give people budget and credit advice when getting the 1oan. They still have to charge about $10 per $100 lent out for 2 weeks just to cover administration fees and defaulted 1oans and not lose money. This is still very high, but not the $15-20 or so that the for profit places charge. Do a google seach for non-profit payday 10ans and some examples will come up of this.
11.3.2007 11:53am
byomtov (mail):
One comment I tried to post addressed the interesting fact, cited by the authors, that the l0ans they studied proved profitable to the lenders, despite higher than normal default rates. Remember these were l0ans that the lenders would not normally have made. Apparently they did so only to cooperate with the study.

This suggests that in the regular course of business the normal l0ans are very profitable. That doesn't answer Zywicki's question, of course, but it does lead me to wonder whether the market for these l0ans is working. After all, the justification for the high rates is that they are demanded by the market to compensate for risk. But if the rate is much higher than needed to do this then something is wrong with the theory.

At the same time, as others have mentioned, it is a bit misleading to quote annual rates for very short-term l0ans. There are administrative costs involved that tend to seriously inflate the annualized rate. If you borrow $100 for a week at 10% the interest charge is 20 cents. But if it costs one dollar to process the l0an, so it costs you $1.20, you're paying a 60% annualized rate.
11.3.2007 11:54am
Bottomfish (mail):
There is a possibility that a person who asks for a l**n at a l*nder of last resort such as a payday l*nder or pawnshop may be so stressed-out from prior money problems (credit card unusable due to late payment, checking account closed due to bounces) that he/she may not be an entirely rational economic actor. He/she may not be able to distinguish between a good deal on a payday l**n or a bad one. Professor Zywicki's paper pointed out that people are quite capable of economic rationality concerning credit cards. Could another study be made of competition between payday l*nders?
11.3.2007 12:39pm
Ken Arromdee:
One comment I tried to post addressed the interesting fact, cited by the authors, that the l0ans they studied proved profitable to the lenders, despite higher than normal default rates. Remember these were l0ans that the lenders would not normally have made. Apparently they did so only to cooperate with the study.

This suggests that in the regular course of business the normal l0ans are very profitable. That doesn't answer Zywicki's question, of course, but it does lead me to wonder whether the market for these l0ans is working. After all, the justification for the high rates is that they are demanded by the market to compensate for risk. But if the rate is much higher than needed to do this then something is wrong with the theory.


What about the opportunity cost that's lost? The l-ans could be profitable, yet less profitable than making a standard l-an using the same money.

(Also, I'd imagine that the exact profit made from a small number of small l-ans would fluctuate wildly depending on exactly how many of them defaulted, so profit this time doesn't necessarily mean the same profit, or even any at all, if repeated.)
11.3.2007 1:38pm
John Burgess (mail) (www):
I don't understand the beef against pawnshops? They work very well for those in need of cash and have disposable items at hand. I had an elderly friend who hawked her diamonds every year to pay for an annual cruise. She then paid off the pawn ticket over the course of the year.

Sure, she might have done better to sell the diamonds and put the money in stocks, but that was too complicated for her and the value wouldn't have made much of a portfolio. The system worked perfectly for her.

I hawked a piece of jewelry when I was temporarily up against a wall and it saved my bacon. I redeemed it a couple of weeks later. The 10an fee was okay by me as saving bacon now was worth far more than spending time researching the optimal investment. I've sold blood and enrolled as a guinea pig for medical experiments, too. They worked just fine for me: the cost/benefit analysis showed that what discomfort I might have had was worth far less than the immediate cash.

I don't recommend using pawnshops as a way of life, but it can surely provide a quick infusion of cash when it's needed. And who of us doesn't have crap he can live without even if pawn redemption proves impossible?
11.3.2007 1:43pm
Dan Weber (www):
If there is an active market for making emergency l0ans, then the people making the l0ans should just be clearing a profit at the risk level involved. That would suggest that the answer is more lenders, not fewer.

However, as others have pointed out, we may be dealing with people who are unable to make rational decisions. Like gambling or drugs, some people are addicted to credit. Perhaps the answer is to require lenders to supply prominent information about credit addiction with every loan.
11.3.2007 1:46pm
Anonymous Coward #39841:
I think we need to distinguish between
(1) Short-term high-interest l0ans, e.g., to carry one over until payday, and
(2) Indefinite-length high-interest l0ans whose true cost is often disguised by the lender.

I have no problem with l0ans that are high-interest for only a limited period of time. But long-term usury can be nefarious enough that the gov't should, at least in some instances, refuse to enforce usurious interest rates.
11.3.2007 1:53pm
byomtov (mail):
What about the opportunity cost that's lost? The l-ans could be profitable, yet less profitable than making a standard l-an using the same money.

Possibly.

I interpret "profitable" as earnong a return in excess of the lender's cost of capital, but that may not be what was meant. For example, if the lenders earned, say, 4% in the aggregate on these l0ans then you would be correct, but I wouldn't call that a profit.
11.3.2007 1:56pm
Joe Bingham (mail):
I admire your patience in explaining all this; the negative response, however, wasn't from readers making cogent arguments, it was from readers who admitted that the reasoning was valid, and explicitly rejected reason as a valid source of moral/political insight.

It's the same response Steven Landsburg got when he was here. People said "well maybe it follows logically, but that's not right."
11.3.2007 3:22pm
Dr. Weevil (mail) (www):
I would assume that p*yd*y lo*n businesses are more profitable than other lo*n businesses, for the same I reason I have never been surprised when I read that [pr0n] theaters make more money than regular theaters. A lot of people would refuse to own a [pr0n] theater or p*yd*y lo*n business even if it was given to them, and far more would decline to invest in such a business, either because they find the business immoral, or because they don't like dealing with the desperate losers they would have as customers, or both. The relative lack of competition would naturally drive the profits up for both.
11.3.2007 3:40pm
Dr. Weevil (mail) (www):
Then again, I would have assumed that the highest-paid specialist in any hospital or medical practice would be the proctologist, but my doctor friends tell me that's not so.

Let's see if the Volokhs annoying hair-trigger spicy-potted-meat filter lets 'proctologist' through.
11.3.2007 3:42pm
DeWayne24:
Let me add some information based not upon academic studies but upon personal experience:

Some years ago, in California, I co-founded an automobile finance company specializing in sub-prime lonz (although in those days, they were more accurately referred to as sub-standard lonz).

Prior to taking the entrepreneurial leap, I worked for another similar firm, where I had access to more than 10K lone histories. I performed some fairly rigorous analyses and came up with these results:

There are indeed "good people with bad credit." They are primarily those who've gone through a recent divorce, and they became, as a group, our target borrowers.

Other findings:

Mexicans, on the whole, are not bad risks, despite low credit scores. Autos in So. Cal., unlike, say, big screen TVs, are in reality necessary in order to make a living. Research showed that even in cases of unforseen economic hardship, family members pitched in to help a borrower make his payments on a car, even while neglecting other borrowings.

Chinese and Japanese won't pay high interest rates, and, for the most part, have ethnic solutions to their borrowing needs.

Blacks, for whatever reasons, are the absolute worst risks. If the first payment isn't bad, almost certainly, no other payments will be forthcoming. Repossession is extremely dangerous and, where available, is impossibly expensive.

Koreans follow the black pattern of non-payment, although repossessions are somewhat easier.

By sharing our research with our dealers (with whom we split profits and losses on the lonz they originated--we just acquired them after a few days), we were able to establish a decent portfolio.
11.3.2007 5:30pm
RJHayden:
Through the wonder of podcasts, I've recently been exposed to some surprising and thought-provoking concepts about how our brain generates emotions. For example, you'd think that if you see a train coming at you, the higher-level thinking parts of your brain would process this fact, think "Ah crap, we're in trouble here!", and generate a fear response that results in an adrenaline rush and appropriate responses from your muscles and limbs and such. But, apparently, it's often (always?) the reverse.

In the train case, your lower-level functioning senses a problem and generates adrenaline, muscle responses, etc. After these things begin taking place, your higher-level functioning realizes "Hey, something is going on with my body here...it feels like I should be afraid of something...", and it's at this point that the emotion of fear is generated and you consciously realize that a train is coming at you.

Bear with me, as this does connect to the current conversation...

I was struck in reading the other thread on usury at the absolute conviction that "X is immoral, regardless of the facts surrounding it, and should be illegal." I believe this is the same sort of thing as the train situation, applied to morality. We process what seems to be someone taking egregious advantage of another's misfortune, and it triggers a low-level morality response before we do any high-level processing...in other words, a "gut reaction" that is understandable and causes us to feel righteous disgust before we get a chance to really examine the situation.

It takes really thinking through the logic and letting it seep into your lower-level processing to realize that the gut reaction may be understandable, but may be misinformed when you consider the surrounding facts. Others have gone over in admirable detail all the reasons that this economic behavior may not be immoral, so I'll just point to another behavior that elicits a similar response: "price gouging" after a disaster.

Like most people, I had a gut reaction to the concept of price gouging. Stringing up those damn gougers wouldn't be good enough for them! But recently multiple articles and more exposure to economic concepts caused me to override my gut reaction and realize that, in fact, efforts to stop price gouging might well lead to killing people. Not sure how to post a live link here, but here is a URL to an article explaining the argument:

http://www.fee.org/pdf/the-freeman/boudreaux.pdf

When it comes both to payday lending and price gouging, my gut reaction has changed. Now I get an automatic disgust reaction when I hear a politician propose legislation to prohibit either...
11.3.2007 6:46pm
Truth Seeker:
what exactly is the argument for why high interest rate 1oans are immoral and should be prohibited?

Because the left feels that everyone should be equal and no one should have enough money to 1oan to another. If someone needs something they should go to the leftist government which will give it to him in exchange for his vote. What's not to understand?

(Everyone should be equal except those in the ruling elite, like to politburo with their limos and private jets so they can do the peoples' business.)
11.3.2007 7:18pm
RL:
Some Mathematician: Everyone gets sick. Everyone has things break. So no, I don't think it's immoral for plumbers to treat the ill and for doctors to fix what's broken. Or vice versa.

And many people find themselves in financial trouble from time to time. But only a small subsection of those will ever need to turn to a payday 1ender. The sole purpose of the industry is to exploit the poor on their journey to the bottom.
11.3.2007 8:43pm
Elliot123 (mail):
RL,

The lender really has no idea where the borrower's journey will end. Some might end up at the bottom, others may end up distributed all across the spectrum. I suspect many highly successful people have used some form of high interest source of cash at some time in their lives.

Many years ago, when I was flat broke, I pawned my bicycle to get gas cash to drive my wretched car to a new job. I had a paycheck in two weeks, redeemed the bicycle, and never looked back. Journeys end up in all kinds of different places.

For those with no credit who need money today, exactly what do you suggest they do today? Not tomorrow, not next year, but today.
11.3.2007 9:26pm
Alan Gunn (mail):
It is simultaneously amusing and distressing to observe people insisting that we help those in need by outlawing their best option. How hard can it be to see that this does harm?
11.3.2007 9:27pm
Thoughtful (mail):
AGunn wisely notes: "It is simultaneously amusing and distressing to observe people insisting that we help those in need by outlawing their best option. How hard can it be to see that this does harm?"

Our society delights--which is to say many of us an individuals delight--in "helping" people by, first, infantilizing them. I think this comes from the difficulty many have in treating those obviously doing poorly with respect and dignity, which we often reserve for "equals".
11.3.2007 9:52pm
fishbane (mail):
For those with no credit who need money today, exactly what do you suggest they do today? Not tomorrow, not next year, but today.

Not really on the point you want to make, but as a self-employed person who is having his market dry up slowly, I'm trying to get into different gigs. I'm low on capital at the moment, but that should change. I think I'm going to open a retail store, and get out to software development.

Memo to budding coders: unless you're smarter than I am, it is really, really hard to sustain an independent business doing contract software development as a small firm. I've been doing it for seven years, and it gets tougher every day. I'm looking for an out. Get big, get bought, or get out. Sorry for the off-topic bit.
11.3.2007 10:03pm
wolfefan (mail):
Hi -

Some people may find usury immoral for religous reasons. Here is the wikipedia entry which discusses the issue from a theological perspective, among others.

http://en.wikipedia.org/wiki/Usury

I'm kinda surprised that no one has mentioned this (unless I missed it.)
11.3.2007 10:35pm
Andy Freeman (mail):
> That doesn't answer Zywicki's question, of course, but it does lead me to wonder whether the market for these l0ans is working. After all, the justification for the high rates is that they are demanded by the market to compensate for risk. But if the rate is much higher than needed to do this then something is wrong with the theory.

Fixing broken markets is often extremely lucrative.

If these "arrangements" are "too profitable", then the solution is to open a biz that makes the appropriate amount of profit. You'll do two good things: reducing the cost to the unfortunate and driving the evil folks out of biz. You'll also accumulate some money to do further good.

Yet, you're unwilling to do so. Is it because your theory isn't good enough to risk your money? If so, why should it be the basis for complaining about others, let alone regulating their behavior.
11.3.2007 11:34pm
Grover Gardner (mail):
Those interested might want to check out this site:

http://tinyurl.com/3ybfxb

for an alternative view of these businesses. Basically, their research indicates that most of those who use such services end up in a vicious cycle that keeps them perpetually in debt.

Personally, I think a more apt analogy is the old "company store" which supposedly offered convenience but in reality created a cycle of dependence and debt for the inhabitants, who had few other options for purchasing necessities.

I mean, what's wrong with twenty-five liquor stores in a poor neighborhood? Well, nothing, until it becomes clear that people are being tempted at a higher-than-usual rate to do something that isn't in their best interest. Is it "paternalistic" to object? Sure, but so what? When people in a certain neighborhood start spending more money on booze than food, you've got a problem. There comes a point when it's legitimate to prevent people from preying on other people, especially when such practices increase costs for others down the line. I'm sure some people here will scorn such "do-gooder" impulses but, altruism aside, there are legitimate reasons for preventing one's neighbors from descending into debt and squalor.

While payday lonz may be reasonable in concept, the reality is likely quite different. I cannot access the original WSJ article, but it seems to be that a long-term look at the situation might tell another story.
11.4.2007 12:16am
_Jon (mail) (www):

I think it is important to note that we - in the United States - do not prosecute killers for murder because it is immoral. We do it because it violates the "right to Life, Liberty, and the Pursuit of Happiness" of the Declaration of Independence.

While many of the laws coincide with things we - as a society - agree are immoral, that isn't why they are illegal. They are illegal because there is a basis for them within the Constitution.

Find the section of the Constitution that supports limiting available interest rates, forms of borrowing, or personal property sales and I'll agree with enforcing it.

Freedom isn't free.
11.4.2007 1:29am
Grover Gardner (mail):
"It is simultaneously amusing and distressing to observe people insisting that we help those in need by outlawing their best option."

Best option, or only option?

"Our society delights--which is to say many of us an individuals delight--in 'helping' people by, first, infantilizing them. I think this comes from the difficulty many have in treating those obviously doing poorly with respect and dignity, which we often reserve for 'equals'."

May I be so bold as to ask--what's dignified about paying 400% interest? As for treating people like "equals"--do you honestly think poor people don't resent coughing up a significant portion of their pay checks to l*an sharks? Would you rejoice in such a "option"? If not, what makes you think they're any different from you?
11.4.2007 1:35am
Grover Gardner (mail):
"Find the section of the Constitution that supports limiting available interest rates, forms of borrowing, or personal property sales and I'll agree with enforcing it."

And what, may I ask, does the Constitution have to say about murder?

"Freedom isn't free."

Certainly not, but it does tend to get more expensive the lower down the economic ladder one descends.
11.4.2007 1:42am
ReaderY:
Zywicki's posts the claim that there no social utility for "tender sensibilities".

Is there any scientific basis for this claim? Is Zywicki seriously maintaining that societies that have no personal relationships or expectations based on personal relationships have the same levels of crime and other indicators of societal distress as societies that do?

Reams of sociological data indicate that emotional relationships improve expectancy, delinquency, and virtually every indicator of societal well-being. The idea that the emotions behind such relationships can be of no interest to the law has no scientific basis whatsover.
11.4.2007 1:26am
Dan Weber (www):
Find the section of the Constitution that supports limiting available interest rates, forms of borrowing, or personal property sales and I'll agree with enforcing it.

Tenth Amendment. The states have the authority to regulate credit markets.
11.4.2007 8:55am
JBL:
1. I think that most people are relatively ignorant of economics and object to payday lending as a gut reaction to exploitation. Without further analysis, it just doesn't smell right that the rich pay 7%, the middle class pays 18%, and the poor pay 400%. A more detailed picture involving the real costs makes the practice much more sensible, but much of the voting public doesn't bother to understand the details.

You can't convince people that your logic or profit or theoretical idealism should override their morality. And of course it shouldn't. And it doesn't, but understanding why it really doesn't takes a more involved argument than many people are willing to sit through.

2. More substantially, a lot hinges on the question "...if there are no externalities..." That's a pretty big if. The constraints faced by the poor and the realities of the way the human mind processes information can effectively create a market failure similar to the familiar asymmetrical information problem.

The studies I've seen tend to indicate that although a majority of payday lending customers use the service more or less as intended, a majority of payday lending profits come from the minority of borrowers who fall into the trap and get stuck renewing the debt indefinitely. For the former group, legal access to short-term small-dollar credit probably provides an efficient solution. For the latter group, it really doesn't. Whether people are better off as a whole depends on the balance between the two groups, on the available alternatives, and on our willingness to accept the negative effect on the minority.

For those perpetual borrowers, we need to consider a more efficient solution. To the extent that the solution involves choices the borrower makes, the heavy debt service seriously limits their possibilities. To the extent that assistance from others can help, it could be provided either as charity or according to a business model that does not cripple the borrower's ability to improve their own situation. Even something as simple as amortizing the debt could help.

The things is, as long as payday lending exists, people use it, and this makes it difficult for the other players to develop solutions. People refer to payday lenders as a lender of last resort, but in practice their prevalence and convenience means that often the regular banks, charitable organizations, and government agencies are the last resort. Banning payday lending would mean people would find illegitimate sources, but it with a little effort it would also clarify the supply and demand figures for the legitimate providers. It would also encourage people to take a more long-term view of their situation. And although illegal sources would exist, they would not be endorsed - from a moral standpoint that is a significant difference.

All this isn't conclusive, since any market regulation has its own negative externalities, especially when the regulation is an attempt to manipulate price or preferences rather than address a specific market failure. Personally, I think that positive individual action is a better solution than negative government regulation. But we need to recognize that externalities do exist.
11.4.2007 3:07pm
byomtov (mail):
If these "arrangements" are "too profitable", then the solution is to open a biz that makes the appropriate amount of profit. You'll do two good things: reducing the cost to the unfortunate and driving the evil folks out of biz. You'll also accumulate some money to do further good.

Yet, you're unwilling to do so. Is it because your theory isn't good enough to risk your money? If so, why should it be the basis for complaining about others, let alone regulating their behavior.


Andy Freeman,

Why do I not get into the business? Because I lack the resources, skills, experience, and inclination to do so. Why does my personal decision invalidate the idea that maybe there are some institutional factors that raise the rates well above what they would be in a purely competitive market?

If we want to understand what's going on it helps to actually think about it, rather than advancing sophomoric arguments.
11.4.2007 3:36pm
Elliot123 (mail):
Interesting. However, here are many who do have the resources, skills, and experience. In every other area of the economy that has very low barriers to entry, competition has stepped in where profits are excessive. If 400% is available, and the lender is making a killing, then I could probably take his business, and make even more at 300%.

But we don't see this. And it's easy to become a payday lender. Is it possible the business model itself does not deliver excessive profits?
11.4.2007 7:58pm
byomtov (mail):
If 400% is available, and the lender is making a killing, then I could probably take his business, and make even more at 300%.

But we don't see this. And it's easy to become a payday lender. Is it possible the business model itself does not deliver excessive profits?


It's possible, certainly. I'd say we don't know without a look at the lenders' books. It's all very well to say competition would drive rates down, but just assuming that that must always happen is relying too heavily on simple theories. I'd like to know more about it before I was as positive as commenters here seem to be.

But suppose these l0ans are fairly priced. Even then it's worth thinking about why that is. After all, the rates are certainly very high. It seems possible to me that a big part of the reason is the administrative costs. If so, why don't borrowers have access to more efficient credit sources? That would yield lower rates to borrowers without reducing returns to lenders.

I don't have answers to all this, but I think it's a more useful way to approach the whole topic than simply sneering at people who think that maybe the payday rates have unfortunate consequences.
11.5.2007 10:18am
Elliot123 (mail):
byomtov,

There are administrative costs, but I don't see how they would fall under some other approach. The small size of the l0ans is a major admin factor. It takes the same resurces to administer a $100 l0an as it does to administer a $1,000 l0an.

However, I think the major factor is not administration, but defaults. The default rate is so high the business is essentially a collection business. Many borrowers don't repay, and those that do repay bear the deadbeat burden in the rates they pay. Lots of l0ans demand expensive collection resources, and those costs are also a burden on the l0an rates.

Some lenders have found the business model loses money even at 400% rates and have changed to more secure options like auto title l0ans. Here the borrower signs title to his car over to the lender when receivibg the cash. He gets the title back when he repays. Another option is the post dated check, where the lender can use the threat of prosecution to encourage payment.

I don't think anyone denies that payday l0ans can have unfortunate consequences. The sneering is directed at those who want to eliminate them without 1)examining what other options te borrowers have, or 2) deermining if the model does return excessive profits.
11.5.2007 11:38am
aizheng (mail):
11.7.2007 3:41am