Think Before You Ban

Published December 22, 2008

Voters will soon be able to decide whether or not the Ohio legislature will be allowed to cut off one of the few financing options that remain for many families, payday lending. (“State ballot issues include interest rate cap on payday loans,” October 20) This is a decision that should not be taken lightly, the real effect of payday loans is not as simple or malevolent as its critics may argue.

Payday lending, while admittedly risky if abused by lenders or not handled properly by borrowers, provides a source of credit when other sources are not available, and such loans are far less costly then overdraft costs and late fees. 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 utilize 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 it 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.