The COVID-19 pandemic has created unprecedented hardship for millions of families in all corners of our country. More … than 16 million people were unemployed in July, countless businesses are either banned from operating or severely restricted in operations due to state and city-wide foreclosure orders, and a third of people reported loss of income. Not only is the pandemic a public health emergency, but combined with its financial impacts, it is a recipe for disaster.
Despite these problems facing ordinary citizens, negotiations between the House and the President over another relief plan remain at a standstill. So, with the prospect of Washington offering another round of stimulus checks or increased unemployment, many people, especially those on low incomes, understandably fear they can make ends meet.
In addition to growing concerns about paying their bills, worries about being able to access credit have also become a major concern. And these Americans are right to be concerned. Consider this: Lenders have cracked down on consumer lending and banks are lowering credit limits and insisting on higher credit scores for the loans they give.
For consumers who have poor credit records or unprofitable credit scores, they could be excluded from the credit markets. To fill this void, some borrowers will need to turn to the short-term dollar lending industry, which offers loans at a relatively high annual percentage rate (APR). While loans can indeed have a high APR, the vast majority of loans are repaid in a matter of weeks or months, without being extended for an entire year.
In other words, the use of RPA as a measure is completely unfounded. This payday loan business can be a much more attractive way to deal with an emergency expense than bouncing a check or finding an unregulated lender on the black market. Importantly, these payday lenders present a cash advance to a segment of the market that otherwise would not be served.
Indeed, according to a 2012 study Pew Trusts Study, 69% of people used payday loans to “cover a recurring expense, such as utilities, credit card bills, rent or mortgage payments, or food” and 16% of people “Faced an unexpected expense, such as a car repair or an emergency. medical expenses. ”Small dollar credit products help them deal with daily household expenses and that unforeseen emergency that can happen to anyone, regardless of income level.
However, Washington Democrats are seriously considering ways to make it even more difficult for people to access these crucial, short-term, low-value loans. Earlier this year, a House committee held a hearing on the need to impose price controls on the amount of interest lenders are able to charge borrowers.
And recently, a senior Democratic Party official introduced legislation aimed at devastating the short-term lending industry by preventing the collection of legal debts in excess of APR 36%. In May, Chairman of the House Financial Services Committee Maxine Waters sought to push the Federal Reserve and the Treasury to exclude low dollar lenders from participation in the paycheck protection program.
Many supporters of an interest rate cap mislead the public by pointing fingers at loans with a high APR, which is simply the interest rate that a borrower will pay over the course of a year because of the composition. However, using the APR to value short-term loans is a bad metric, as most short-term loans act as cash advances that are paid in full in the borrower’s next pay period.
As anyone who has followed Economy 101 knows, government-imposed price controls don’t work. Virtually every example in history shows that price controls worsen the very problems they are meant to solve.
Whether it’s gasoline, bank interchange fees or prescription drugs, setting price controls below market rates leads to shortages, tightens the cost bubble to another part of the world. economy and imposes a dead weight on society.
Rate caps also interfere with a lender’s ability to judge borrowers who may be creditworthy or unworthy of credit. To this end, interest rates are extremely important to lenders as they allow them to price all of their fixed and contingency costs. Factors such as lender costs and risks and consumer demand for credit all affect the cost or cost of credit. Any short-term interest rate includes many financial factors, such as the risk of a borrower defaulting and the fixed costs of running a business.
It is clear that some members of Congress are more interested in trying to score political points regarding payday loans than the real political merits and unintended consequences of a 36% government-imposed price control. It is unfortunate that many lawmakers talk about making credit and financial services more accessible to traditionally underbanked populations and at the same time advocate disastrous policies that would severely hamper consumer markets.
Thomas Aiello is the Director of Policy and Government Affairs at the National Taxpayers Union.