Wall St. Journal article – “Cracking down on payday lending will drive borrowers to less savory creditors.”
The following article was published in the Wall Street Journal on Nov. 26, 2013. This article discusses how British Chancellor of the Exchequer George Osborne is making a mistake by instituting new regulations on payday lending. The article cites examples of “unintended consequences” in the U.S. in states such as Georgia and North Carolina. Interesting read.
Osborne’s Next Bad Idea
Cracking down on payday lending will drive borrowers to less savory creditors.
Updated Nov. 26, 2013 8:53 p.m. ET
George Osborne has spent much of the last three years decrying a lack of available credit for the little guy. But now the U.K. Chancellor has hit upon an idea to help hard-up people to whom banks won’t lend: crack down on the lenders that do.
Mr. Osborne announced Monday that bank reforms going through Parliament this week include instructions to the U.K.’s consumer-finance regulator to cap the cost of so-called payday loans—typically high-interest, short-term, three-figure loans to tide customers over until their next paycheck. As he explained to the BBC, the new rules will limit “the total cost of credit, looking at the whole package,” fees as well as rates, as “a way of making sure that hard-working people are served by the banking and the credit system.”
The government estimates that payday lending was worth roughly £2 billion in 2011-12, up from £900 million in 2008-09. The industry’s popularity since the 2008 crash has made it a pet bugaboo of the regulatory left. Wonga.com, an online lender that booked a £62.5 million profit last year, has had its ads banned by the Advertising Standards Authority. Headlines scream that Wonga and its peers charge four-digit annualized percentage rates. Wonga’s 1% daily interest rate would add up to an APR of 5,853%—if Wonga didn’t stop charging all interest after 60 days for its 30-day loans.
The government has so far resisted calls to cap the industry’s rates and fees, rightly warning that price controls would only restrict supply. They will also drive those who need money, but can’t qualify for loans under the new rules, to less savory credit channels.
Consider the experience of the U.S. states of Georgia and North Carolina, which banned all payday lending in 2004 and 2005. Borrowers instead went out of state or to less scrupulous creditors. The preliminary result, according to a 2007 study by the Federal Reserve Bank of New York, was that relative to other U.S. states, households in Georgia and North Carolina “bounced more checks after the ban, complained more about lenders and debt collectors, and were more likely to file for bankruptcy.” Some consumer protection that turned out to be.
People often turn to payday lenders because they have little choice, often on account of their credit histories. That’s why they’re often bigger credit risks. Barring lenders from charging enough to cover those risks can only result in less access to loans for people who need them.