Rates are Too High -- So Lets Limit Competition

Apparently, some of our local politicians in the Phoenix area are upset about payday loan companies.  According the an AP report in the AZ Republic:

The stores cater to customers who live paycheck to paycheck who need
quick access to a few hundred dollars for rent, car repairs or just to
make ends meet. Banks traditionally don't make those type of small,
short-term loans.

So these stores provide loans to people no one else will touch.  And customers use their services of their own free will.  So what is the problem?  Well, not surprisingly, the rates on these loans are high, and the default terms tend to be drastic.  "Activists" think that people are making the wrong decision using these services, and, to be fair, I would certainly advise anyone who asked to try to find another alternative.  But what do my preferences matter?  Its easy for me to say in my middle-upper class hubris that such services don't make sense, but I have a steady job and ready access to bank loans.  In a free society, both I and those activists are free to convince people to not use these services, but its wrong to artificially limit people's choices out of some elitist sense that we can make decisions for other people better than they can for themselves.

Besides, lets think about the alternative.  These folks are not going to get bank loans -- in fact many customers may be illegal aliens who are, post 9/11, effectively barred from the banking system.  The only other alternative before these payday loan companies were loan sharks, whose interest is even higher and whose penalty for non-payment even more dire. This reminds me of the people who decry Nike "sweatshop" jobs in poor countries.  "Activists" similarly decry these jobs as if the alternative is $25 an hour office work, when in fact the alternative is actually grinding subsistence agricultural work for half the pay.  You may not like the payday loan companies, but they are replacing a much worse system.

But the really funny thing about this article is their proposed solution to the problem of rates for these payday loan services being too high.  Their solution?  Limit competition!  (emphasis added)

Arizona now has more than 600 payday loan stores - with 165 in the [Phoenix suburb] Mesa area alone - and some residents are upset about it.

"People are sick of it in west Mesa," said Dave Richins, a neighborhood
activist and executive director of the West Mesa Community Development
Corporation.

Richins and other critics claim the stores exploit customers with high interest rates.

[Phoenix suburb] Peoria blocks the shops from opening within 1,000 feet of a competing
store. Phoenix and Tucson are looking to that city's restrictions as a
model for new rules in their communities, with action possible by early
next year.

Gee, I bet that will help keep rates down -- make sure there are no competitors nearby!  Lets make sure it is as hard as possible to compare rates, particularly since the customer base is one that can't afford the gas, or doesn't even have a car, to drive all over town shopping.  I wonder why no one is suggesting the same thing for gas stations to keep gas prices down, lol.

  • Tim

    Although I agree with you I do think that the pay day loan business as it is being run is unethical.

    The consumer is rarely aware of the details of the terms of the contract and the penalties for defaulting. My father was approached by a representative of a pay day loan chain about using his property to open a new franchise. The way the business was explained to him the profit is made by selling default loans to a collection agency. The example he was given was that if a customer walks in looking for 100$ they have to
    1. sign a contract
    2. write you a post dated check for 116$.
    3. have a valid picture id and checking account.

    If the check clears you make 16% interest on 2 week loan. If the check doesn’t clear you sell the check to a previously contracted collection agency for 120$ and make 20% interest. The collection agency than attempts to collect $500+ (I don’t remember the exact figure offhand) Michigan law caps the amount you asses on penalties and collection costs. The contract specifies that the person receiving the loan will pay all of these. It also stipulates arbitration rather than trial to settle any disagreement. It made me curious so I’ve gone into three different check cashing stores; 2 in Michigan and 1 in Wisconsin, and have not been able to get a clear explanation of the terms and amounts of the penalties for failure to pay on time. The contracts were difficult for me to understand and all needed to be cross referenced to legal statute to understand the terms of the loan.

    I recognize that this is a legitimate business. I also recognize that it fills a need. However, from what I’ve found the consumer does not have the information necessary to compare alternatives. So would additional suppliers compete by offering the consumer better terms? Or by just bringing bodies through the door?

  • Max Lybbert

    Tim, additional suppliers would compete by offering somebody in a bind more places to go. Then they would be able to actually tell some of the companies "unless you improve your system, I won't go to you." This would be especially true if former customers had a way to recommend new customers.

    The issue you bring up makes a decent case for "labeling." I personally have no problem with the nutrition information placed on the foods I buy, but I would have a problem if I were prohibited from buying "unhealthy" foods altogether.

    So perhaps payday loan companies should be required to spell out various scenarios and the entire story about the downside. Perhaps they should also say "and, btw, even if this goes to court and we (or our sucessor) gets a judgement against you, if you don't have any property, all we can do is call you over and over and ask you to pay us."

  • markm

    Not that understanding the terms will stop everyone from getting such loans. After all, I'd think that most loan shark customers understand that they are pledging body parts as "collateral", but they either think they will be able to pay it on time, or the consequences now of not getting the loan outweigh the frightful possibilities later.

  • http://politics.lel-hosting.com/ Matt

    These people are all adults. If we don't trust them to borrow money, why are we so determined to let them vote?

    A lot of the opposition to the payday loan business I've seen (although I'll admit that I've never lived in AZ or even visited there, so I can't say what it's like where you are) is little more than extremely thinly disguised racism and classism. "We know what sort of people use those companies, and we don't want them showing up in our neighborhood or even our city, except to wash our floors and cut our lawns" is the un-subtle subtext.

  • http://www.fattriplets.com FatTriplet3

    It seems reasonable that this industry should have some sort of Loan Disclosure/Good Faith Estimate as required by the mortgage industry. In fact, is it fair to argue that this would enhance competition by alleviating Information Assymetry and allowing customers to make more informed choices?

    Of course, Warren is absolutely correct that the "solution" offered by Peoria is anti-competitive and will, ultimately, undermine the needs of the poor who use these services. I also agree with Matt. Their is a veiled classism to those paternalistically claiming to help the people that use these services.

    Steve

  • http://financialrounds.blogspot.com/2005/10/this-weeks-carnival-of-capitalists_31.html Financial Rounds

    This Week's Carnival Of The Capitalists

    This week's COTC is up at TriplePundit. There's lots of good material this week. Here's some of the pieces that tickled my fancy:

  • James Stephenson

    What it boils down to is, most Government officials do not understand basic Economics. Heck, most college graduates do not understand supply and demand.

    Raise minimum wage, it does not really cost anything. Wrong, it means an increase in cost of goods and services. (What most people do not realize is that Union salaries are tied to Minimum wage, which is were the call comes from to raise minimum wage)

    Tax Business more, it does not really cost anything. Wrong, it means the business will then pass the tax onto the consumer, meaning an increase in cost of goods and services.

    Tax the Rich more, it does not really cost anything. Wrong, it inhibits amount of investment income. In the long term, means an increase in cost of goods and services.

    Put prices limits on things, or not allow competition. Price limits cause severe shortages, and cutting competition means an increase in cost of goods and services.

    All those things do is make people feel like something is being done, when in fact nothing is being done.

    But try to explain those concepts to a government official or a socialist and you get blank stares. Makes you want to tap your mouth and say, "Is this thing on".

  • http://www.searchlightcrusade.net/posts/1130868375.shtml Searchlight Crusade

    Links and Minifeatures 11 01 Tuesday

    Sorry I didn't post much over the past few days. Flu shot I got Friday kind of got to me, like they say it sometimes does. I still feel like I am going to lose the contents of my stomach - except when I actually eat, I usually find that I am very hun...

  • http://pdl.blogs.com/weblog/2005/11/the_use_of_zoni.html The Pay Day Loan Blog

    The use of zoning to keep payday lenders out of an area

    If you do a google news search on payday loan, there are a LOT of articles on local municipalities imposing (or trying to impose) zoning restrictions on payday lenders. Chattanooga, San Francisco, Tempe, Las Vegas... sounds like the Route 66

  • http://pdl.blogs.com/weblog/2005/11/the_use_of_zoni.html The Pay Day Loan Blog

    The use of zoning to keep payday lenders out of an area

    If you do a google news search on payday loan, there are a LOT of articles on local municipalities imposing (or trying to impose) zoning restrictions on payday lenders. Chattanooga, San Francisco,Tempe, Las Vegas... sounds like the Route 66 song.

  • Basel

    damn corporate amerika!

    check out some of the interest rates that payday loan companies are allowed to charge here, http://www.moneysavingfreetips.com/no-teletrack-payday-loan.html

    Mississippi ($400, 18%)
    Missouri ($500, 75%)
    Montana ($300, 25%)
    Nebraska ($500, 15%)
    Nevada (no limit, no limit)
    New Hampshire ($500, no limit)
    New Mexico (no limit, no limit)

  • http://www.onlineloansblog.com/ jesica

    You can check diferent lending plans on our blog site ( http://www.onlineloansblog.com/index.php?cat=20 ) like
    SUB PRIME LENDING
    SUB PRIME LENDING
    PREDATORY LENDING
    DEFINED BENEFIT PLANS
    and so on......

  • http://www.onlineloansblog.com/ jesica wilson

    You can check diferent lending plans on our blog site ( http://www.onlineloansblog.com/index.php?cat=20 ) like
    SUB PRIME LENDING
    SUB PRIME LENDING
    PREDATORY LENDING
    DEFINED BENEFIT PLANS
    and so on......