“Payday” Loans Are Stupid — But Don’t Ban Them
There are many things for the average, reasonably intelligent person not to like about payday loans. They have colossal APRs that are in the hundreds (or even thousands!) of percentage points.
These loans involve massive risks, and the companies that produce them usually target financially “vulnerable” people, to whom a 500% APR for a short loan to pay the gas bill sounds like a good idea. In other words, these loans are generally crafted for “suckers.”
Isn’t this dangerous? Shouldn’t these predatory practices of usury be banned by law? Though it may seem surprising, a rational analysis of this question brings only one answer: no, these types of loans should absolutely not be banned, as has occurred already in several places, including Georgia.
Banning the Loans as a Principle
If the government is going to ban these types of loans, then it must, to be credible, invoke a principle. For example, when it bans murder and theft, it is invoking the principle: “it is wrong to violate a person or his property.” What is the principle that the government would invoke to ban payday loans? More than likely, the answer would be: “it is wrong to run a financial scheme that knowingly scams financially vulnerable people out of their money.”
This principle, however, must be applied to all areas — including the government run lottery system and other financial matters which are run by the government. If the government is going to ban payday loans for knowingly producing a bad deal for uneducated people in financially vulnerable situations, then it must also cease its own lottery (which is used to raise government funds), since the lottery fits into this principle, as well.
Practical Concerns
Philosophical and moral principles aside, it is also completely impractical for the government to ban payday loans, and it is incompatible with the free-market society in which we live. People should be free to make their own choices, whether they are buying a lottery ticket or taking out a loan that qualifies as gross usury under any definition of the term. Yes, it might be inadvisable or even foolhardy, but people are free to make risky choices, just as people are free to go to Las Vegas for a weekend.
Another practical concern to consider when asking the question, “Should payday loans be banned?” is this: where is the line drawn? At what point does the government say, “this loan is OK, but this one is too risky”? There is simply no rational way to determine a standard for evaluating which loans should be banned and which ones should stay legal.
A Course of Action
For people who do genuinely care about the well-being of society, of course, payday loans should be strongly discouraged as a business that preys upon financially vulnerable men and women. How is it that the moral humanists in society can achieve this minor goal of ending payday loans in a way that does not invoke the government?
People who care about ending payday loans can do any number of things to end them peacefully, no laws involved. One obvious example is to stop supporting them financially. Dollars, after all, are votes of the free market, and supporting them by participating in their services makes them that much stronger.
For those fortunate enough to not be in the vulnerable position of considering a payday loan, however, other methods are possible. One could step up and be the person who helps friends and acquaintances, to the best of his ability, in a financially difficult week, for instance.
Alternatively, one could write articles or speak the truth of payday loans, speak out, or just encourage financial literacy all around. With the advent of the Internet, no one has an excuse for financial illiteracy. This article is proof in the pudding.
People should be encouraged to live frugally, work harder, find alternative means of building an income, manage their wealth, and maybe even start an investment club. Payday loans shouldn’t be used and should be ended, but the government should be the last institution to get involved.