Should Payday Loans be Controlled by the Government?

According to a recent article in the Baptist Press, the Southern Baptist Ethics & Religious Liberty Commission (ERLC) is partnering with several other organizations to “target” payday loans. They see these loans as an abuse of the poor and want the federal government to “put an end to the predatory practices of payday lending.”

So what exactly does that mean? Do they want all businesses who provide short-term loans to be forcibly closed by the government? Do they want the federal government to fix prices for this type of loan? For all loans? Do they want the government to force these lenders to give preferential rates to people with certain incomes, regardless of credit history? Do they want government to force banks and other traditional lenders to provide loans to those who otherwise would not qualify (can you say sub-prime mortgage crisis)?

One of the problems with social justice crusades is that social justice is hard to define. What exactly is a “just” interest rate or a “just” price for a car or a loaf of bread? The Bible verses referenced in the BP article quote 0% when they reference interest, is that what they’re suggesting?

There’s also a fundamental misunderstanding of the free market and of economic principles behind this push. Interest is not a random number. Interest is a price. It is the price of money. Price is where the interests of the consumer and of the business intersect. General Motors cannot charge anything they want for a new Chevrolet. They can only charge what people are willing to pay. If they cannot make a Chevrolet for less than what the public is willing to pay for it, they will stop making Chevrolets. If these payday lenders are simply greedy predators out to make as much money as they can on the backs of the poor, why don’t they charge twice or three-times the rates they currently do? After all, they’d make more money that way.

Many a social justice crusader has tried to use government price fixing to help the poor. Unfortunately, when the price a business can charge is set below the market rate, the poor (and everyone else) soon find the store shelves empty. Try to buy a television or a roll of toilet paper in Caracas these days.

The truth is these lenders provide a service that is needed – otherwise they wouldn’t exist. One of the unintended consequences of forcing lenders in high risk markets to artificially lower their rates is that such lenders will soon disappear. Then the people who use their services to help make ends meet, instead of having a short term loan at a high interest rate, will have their car repossessed or their electricity cut off or be evicted from their homes. Thomas Sowell goes into this in more detail in an excellent article called “Predatory Journalism on Payday Loans and Price Controls.” Sowell says in part:

…demagoguery against “predatory” lending might well be called predatory journalism — taking advantage of other people’s ignorance of economics to score ideological points and promote still more expansion of government powers that limit the options of poor people especially, who have few options already.

It’s easy to demand that the government force businesses to assume additional risk in order to satisfy your sense of social justice. But, if you really believe payday loans are too expensive, start or invest in a company that provides such loans at 6% per annum. If that’s a workable business model, the meanies charging too much will soon be out of business through the invisible hand of the market rather than the iron fist of government.

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