Consumerist always makes for some fun reading. Usually they spend their time over-hyping the most trivial (and occasionally fraudulent) customer complaints and simply vilifying corporate America for having the audacity to offer us products that we may choose to buy. They have a particular hatred for short-term, unsecured loans, commonly referred to as “payday loans.”
In this post, they attempt to discredit an obviously thoughtful article produced by two men with some pretty thorough credentials (Harvard and UVA to be precise). Consumerist, as usual, seems to completely ignore the main thesis of the article and rather substitute some rather off-topic fallacies in an attempt to try and convince the reader that payday loans are in fact totally evil.
The very first argument they attempt to make is a pretty blatant and unapologetic appeal to authority. Many states (as well as the greatest source of wisdom and common sense in the known universe: The U.S. military) have made them illegal (largely thanks to special interest agitators like Consumerist), therefore they must certainly be bad. This is what passes for a well-constructed argument on this website. The possibility that the government might ever make a mistake and actually do something that doesn’t result in sunshine and rainbows for everyone is not considered. The fact that many states have not in fact made it illegal for poor people to get loans is not considered particularly relevant.
They then go on to quote someone named Gina Green from something known as the “Center for Responsible Lending” as an authority on these matters. A biography for Ms. Green is not available, nor is a link (or any background information whatsoever) provided for this center. Ms. Green responds by bringing up different legislation for some reason, and then relying on the only argument these people ever have: pointing out that payday loans charge exorbitant levels of interest as measured by the annual percentage rate (APR). For some reason, the left is absolutely obsessed with APR and considers it to be the only legitimate form of measuring interest. Of course, percentage-based APRs mean very little to the average poor person who is in need of a payday loan. This person is quite likely to have little or no banking experience or financial expertise. They don’t know (and likely don’t care) what an “appropriate” (a completely subjective term, as an “appropriate” level of interest can only be truly determined by market transactions) level of interest is. They do not consider the APRs of various car loans, mortgages, and credit cards to be particularly relevant to their payday loan transaction, probably because they aren’t. The payday loan customer is interested in three things: How much money am I getting? When do I have to pay it back? How much do I have to pay back? These are three very simple questions that are easily answered and easily understood. By answering these simple questions, the typical payday loan is arguably much more transparent, when measured by the criteria that their customers actually care about than your typical auto loan or credit card. As far as the assertion that these high interest rates would “make loan sharks blush,” that statement assumes that interest rates are the only criteria consumers care about when seeking loans, which is obviously not the case. Loan sharks are unsavory fellows, and the penalty for defaulting on one of their loans is significantly more severe than for defaulting on a payday loan. Because payday loans are more preferable to loan sharks in any number of other ways, they can charge a higher rate of interest.
Anyway, Consumerist continues to make an irrelevant and nonsensical comparison to subprime mortgage loans (an odd comparison in that many poor people did in fact benefit from sub-prime lending, and it was the banks the taxpayers who ended up footing the bill). They then cite a letter by a Democratic Senator (truly a friend of the working poor, who only wants to help them by eliminating some of their choices!) demanding that banks not engage in payday loans. Nevermind the fact that the vast majority of payday loans do not in fact originate in banks.
They then throw in a quote from “Consumer’s Union senior policy counsel Pamela Banks” (once again, no biographical information is provided) that completely misses the point and isn’t even worth reproducing and refuting. They save the worst of all for the end of the article though…
“When stripped of its academic pretense, the Zywicki and Sarvis article is effectively saying that bad loans help people.”
No, actually the article is saying that payday loans help people. Whether a loan is good or “bad” is a completely subjective question that can only be answered by the individual who seeks out the loan. While political elites and professional bloggers may live a lifestyle that allows them easy access to cheap, low-interest credit, much of America’s working poor does not. To these people, payday loans offer a convenient way of meeting obligations. The loans are obviously not “bad” for them, because they choose to get them. The mere fact that they seek these loans out in such large numbers is proof positive that the loans are in fact good for consumer. Ultimately, the Consumerist argument comes down to same argument always offered by the elitist nanny-staters and central planners: That the poor are simply too stupid to manage their own affairs. That if trusted to run their own lives, they will make “bad” decisions, therefore it is the role of the government to limit their choices and deprive them of what they believe their best alternatives are. Contrary to what the elites believe, making payday loans illegal will not mean that the poor will now magically have low-interest credit cards and receive favorable, low-interest loans from banks. It means that they will either resort to even less reputable methods, such as loan sharks, or that they will simply be unable to obtain credit at all, in which case the consequences could be devastating, and include all sorts of nightmarish scenarios. They might have their electricity turned off. They might not be able to afford transportation to get to work. Their children might go hungry. They might resort to crime to meet their obligations.
But at least they won’t have to pay an APR that is “too high,” right? It is absolutely impossible to help the poor by making a list of all of their options and then crossing off the option that they actually chose, and this is exactly what payday loan prohibition hope to accomplish. Payday loans are a good thing for society. They provide short-term financing for desperate individuals who otherwise would go without it. They are a completely moral and honorable instrument of modern finance that should no longer be vilified. By seeking to eliminate them, the Consumers Union shows astounding ignorance, combined with a complete and utter disdain for America’s working poor.