Opinion on capping rates at 36%

The Progress Illinois blog wrote a very thorough article on the current landscape of the sub-sub prime lending in Illinois. Below is the comment I left on their site.

Here is the biggest problem in the industry. The people that pay have to pay for the people that don’t pay. There’s always two sides to a story. Here is the other side: the people that pay back a loan are paying for the people that don’t pay back their loan. Probably close to half the people that take out a payday loan, don’t make a single scheduled payment.

If everyone paid back their loan, you could make the interest rate 7% and everyone could still make money.

By capping the rate at 36%, you’re just locking people out of the system. If people think that locking these people out of the system is the best interest of everyone, then they can cap the rates. But, why stop there, let’s look at a few other examples like credit cards and mortgages. How about only people with 700 or greater credit scores should be able to have credit cards and/or get a mortgage in this country. Then we wouldn’t have the mortgage crisis and fewer people would be filing bankruptcy.

By capping the interest rates for the payday loan product, you’re just forcing these people to go on a “financial diet”. The big pink elephant in the room is that if you cap the rates at 36%, what percentage of the people can borrow money at 36%. My guess would be around 10% and they would get a huge lecture from the lender, first.

If they made a public record of credit scores and the people that use payday loans, they would realize that this customer can’t be lent to for under 36%.

My opinion is that if you’re using credit to pay for an expense, it doesn’t matter if you’re paying 5% or 500%, it’s not a good financial move. Paying 5% interest for an expense is silly and paying 500% interest is just stupid. You’re telling me that we need a law, in this country, for people to understand this concept? The consumer groups will say, they don’t know what their doing because they’re desperate. We are talking about adults that have the right to vote, right?

If you cap the rates at 36%, most of the lenders will close their doors and people will go to the internet and get a loan from an offshore company where they don’t even pay federal or state taxes. The people in the middle class and the consumer activist groups will sit down and think they made the world a better place, while the lower middle class will get doors slammed in their face by banks, friends and families because they needed $300 yesterday. Maybe this is a good thing.

The worst thing you can do is let people off the hook. Regulate the industry and when people come to you and say, I can’t pay this loan back, don’t tell them it’s not their fault because it is. If they didn’t take out the loan, they wouldn’t be in this mess. They’ll ask their friends opinion about their car, their shoes and their new haircut; but when they walk into a payday loan store, they don’t ask anyone’s opinion because they know they’re wrong and no one is holding a gun to their head. So, tell them that it is their fault and that they’re harming themselves and that they shouldn’t borrow money to pay their bills. Finally, tell them not to take out another loan. What ever happened to personal responsibility?

What the consumer groups and people that care should focus on is how to move the people who do pay and are responsible “up the credit elevator” so that they can get a loan for double digits, instead of triple digits. In the end, this will do more to help people then locking them out of the system. If you cap the rates at 36% this group of borrowers will never move “up the credit elevator.”

As far as the term “unconscionable”, the sad reality is that this is relative. To the lower, working middle class, these rates are their reality. That’s what free markets is about. There is a wide spectrum. The people that want payday loans to go away, typically don’t use the product. They’re just using their own moral superiority to make these judgements for the people that use it

Anyone, regardless of interest rate probably wishes they didn’t get the loan after they spent the money and can’t pay it back.

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