Limiting Consumer Choice Is Bad Policy

Published December 22, 2008

Critics of payday lending have managed to convince voters in Ohio and Arizona to force payday lenders out of their states. While this was done legally, it also was done through the use of misleading and inaccurate information and emotionally charged propaganda. Now, cities like St. Louis are beginning to push for city-wide regulations limiting the number of payday lending companies (“St. Louis moves to limit payday loan stores,” November 18)

The costs of payday lending have been grossly misrepresented, warped by “consumer groups” to appear more egregious than they actually are. For example, critics have manipulated a $15 fee into a 390 percent APR interest charge, when the loans themselves are not meant to be calculated on an annual basis.

These loans were not forced upon anyone. The market for these loans developed and thrived because the lenders provided a service that was needed by consumers. The inherent risk of these borrowers necessitates the fees charged. If the fees are found to be unreasonable, consumers will not use the service. The government should not be interfering with the personal choices of consumers.

If the goal of payday loan regulation is to minimize fraud, then the law is both justified and necessary. But if the goal is to protect consumers from themselves, then the law steps beyond the government’s proper authority.

Even the effectiveness of a payday loan ban is questionable: According to a study conducted by the Federal Reserve Bank of New York, states with bans on payday lending experience an increase in bounced checks, higher rates of bankruptcy, and more complaints related to collections.