Democrats claim they are serving the poor, but their latest plan will hurt the ability of low-income Americans, especially racial minorities, immigrants and youth, to take out loans that pay bills like water and water. ‘electricity.
As well-intentioned as it is, the condescending plan by the Senate Democrats to set a national interest rate cap is counterproductive to those in need and could very well cause them to underpin financial products in a unregulated underground economy.
Sherrod Brown, Chairman of the US Senate Banking Committee (D-Ohio) intends to relaunch its proposal to cap national interest rates at 36%, believe that he can exceed the threshold of 60 votes for obstruction. But the main GOP member of the committee, Sen. Pat Toomey (R-Pa.) Reportedly intends to block it, as it should.
Reuters reports that “an industry group representing payday lenders said such a cap would effectively eliminate small dollar loans by making them unprofitable,” and data from the Consumer Federation of America shows that “while the rate Median interest on small loans is between 25% and 38%, the rates of some short-term loans in the hundreds of dollars can reach 251%. Try the mighty paydaynow and check the available loans for you.
But Tom Lehman, associate professor of economics at Indiana Wesleyan University, points to the intellectual sleight of hand of the real world when Democrats use those inflated, three- or four-digit annualized interest rates. At the Mises Institute, he gives the example of a typical payday loan fee, $ 15 per $ 100 borrowed for a typical loan term of just 14 days, making the annualized compound interest rate “easily in the triple-digit range.”
Lehman also writes of an academic analysis estimating the median payday loan fee in North Carolina to be $ 36, with a two-week median loan of $ 244, which is an effective annual percentage rate of 419. %.
“Critics of payday loans view these relatively high interest rates with great concern, claiming that the fees charged exploit poor borrowers who lack personal financial management skills,” Lehman writes. “Yet the effective annual interest rate on the payday loan may not even enter the borrower’s mind. In all likelihood, the borrower does not care about the “effective APR” of the loan. The real price signal to which the borrower responds is the lump sum that is charged for withholding the post-dated check. If the value attached by the borrower to the immediate cash advance exceeds the value of the principle plus fees within one or two weeks, then the borrower will undertake the transaction outright.
If Democrats are successful in eliminating short-term loans in their current form, these borrowers will still need access to credit, forcing them to use even more expensive means including overdraft protection, personal checks without supply or alternatives to the underground market. For low-income Americans, these alternatives to payday loans could push them above a financial advantage.
Thomas Miller Jr., professor of finance at Mississippi State University, wrote that “A 2013 survey by Pew Charitable Trusts found that over 60% of payday loan users are expected to delay paying other bills without having access to these loans. The alternative to short-term loan debt is to go into debt to existing creditors, where non-payment could mean loss of access to utilities, such as water and electricity.
If Senate Democrats are successful in getting enough anti-free market Republicans to sign this bill, they could literally leave America’s most vulnerable people out in the cold.