Nothing seems to bring out the paternalistic instincts of the left these days more than payday lending.
The Arizona Legislature passed a law permitting the practice in 2000. The law, however, had a sunset provision and evaporates in 2010.
The industry got worried that the Legislature wouldn’t extend the law. So, it put Proposition 200 on the ballot, which extends the law without an expiration date while restricting certain industry practices.
Payday lending involves small loans (from $50 to $500) for a short period (five to 35 days).
The borrower gives the payday lender a check for the amount to be borrowed and, under Proposition 200, up to a 15 percent fee, to be tendered at some later date. The borrower walks out with cash.
It’s a terrible deal.
It’s not as bad as opponents depict it. Opponents take the maximum fee on a two-week loan, annualize it, and say that it’s an interest rate of 391 percent.
Under Proposition 200, those having a problem repaying the loan can have, at their option, a repayment plan of up to four months with no additional fee. In that circumstance, it would be an annualized interest rate of more like 36 percent.
Still, a terrible deal.
However, it’s an understandable transaction in dollars to those who make it. Get $200. Pay $230.
The question is whether state law should prohibit that transaction, as Proposition 200 opponents would like to see.
To get a payday loan, a borrower has to have a job and a checking account. As a practical matter, it’s a mechanism used by the lower middle-class, not the poor.
Opponents claim that payday lending is a debt-trap, that people end up owing much more than what they originally borrow. Nationally, according to the opposition’s literature, the average payday borrower pays “nearly $800 on a $300 loan.”
In Arizona, however, that’s a mathematical impossibility.
The practice opponents object to is rolling over the debt for an additional fee. So, a guy borrows $300 and owes $345. But he can’t pay it, so the lender extends it for another period for another $45 fee. And so on.
Arizona law already limited such rollovers to three times, so here the debt could never have become the multiple opponents claim.
And Proposition 200 would eliminate such rollovers entirely. The payback period could be extended, but no additional fee could be charged.
Payday loans are a very bad option. But there are not really many alternatives for small, short-term loans.
The industry is competitive. There are several national players and many local firms crop up wherever the practice is permitted. These days, that includes the vast majority of states.
There aren’t major barriers to entry. So, if money can be made by providing such loans for less, the door is wide open.
About 5 percent of Americans have taken out a payday loan. There’s scant evidence that their lot would have been better if denied that opportunity.
A study by two economists with the New York Federal Reserve Bank found that after Georgia and North Carolina abolished payday lending, bounced checks and Chapter 7 bankruptcies increased.
Opponents of payday lending tend to depict those in the industry as loan sharks, because of the very high interest rates they charge. However, if you don’t pay back a payday lender, he has to take you to court. If you don’t pay back a loan shark, he breaks your legs.
That’s an important difference. Creating legal opportunities for high-rate loans reduces the market for illegal ones.
No one makes anyone take out a payday loan. It’s a voluntary decision on easily understood terms.
Proposition 200 opponents think it’s a bad choice for lower middle-class people and want to make it unavailable.
If Proposition 200 opponents don’t like payday lending, they should channel their energy into stimulating and publicizing less-expensive alternatives for small, short-term loans.
However, this particular option, the payday loan, shouldn’t be taken away from those who want to use it.
Robert Robb, an Arizona Republic columnist, writes about public policy and politics in Arizona. E-mail: robert.robb@arizonarepublic.com