A finance professor from the University of Kansas has an interesting op-ed in the Wall Street Journal today, discussing the possible dangers of restricting short-term loans. Prof. DeYoung hits on the key point that short-term payday loans actually stack up well against similar options like overdraft fees and paying bills late. He also points out a recent study that showed that 80% of payday borrowers took out the loans because they lacked sufficient funds in their bank account before the next payday and didn’t want to pay the fees.
When it comes to weathering financial storms, the BEST decision, is not needing short-term loans at all, but having enough saved to make it over the hump. But our recent survey showed that 39% of Americans only have two months worth of expenses saved and 64% have less than six months saved. 6% admit to having no savings at all. (I expect that last number is really a little higher, because people without significant savings might be embarrassed to admit it.)
So if someone is hit with an emergency that they can’t pay for out of savings, a short-term payday loan may actually be the best choice available. Clearly, short-term payday loans are expensive. And relying on them frequently, or rolling over the loan for longer periods of time, is not a good idea. But used responsibly, with an understanding of the costs upfront, they can save borrowers from much more expensive fees and charges.
Everyone should try to build up a savings cushion to manage unexpected expenses. But for those caught without an emergency fund, DeYoung makes an important point. Overeager regulation by Congress could end up doing more harm than good.
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What this really means is that bank overdraft fees are even worse than predatory loansharking. The report carefully identifies the most affordable short-term interest rate in excess of the equivalent of hundreds or thousand of percent annually, but apparently never questions whether such rates should be allowed in the first place.
What Congress ought to do is lump both short-term loan fees and overdraft penalites into the same category and limit them all to something reasonable – not simply ratify the predatory practices of loan sharks because the predatory practices of “respectable” bankers are even worse. It’s the entire system that is screwing people, and bankers are as guilty as street thieves. I thought that lesson had surely become clear by now.
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