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Payday Loans

Robert Frank on the political and moral economy of payday lending:

Payday Loans Are a Scourge, but Should Wrath Be Aimed at the Lenders? - New York Times: [T]he outrage currently directed at lenders who extend credit at extremely high rates of interest to economically disadvantaged groups. Among these lenders, so-called payday loan shops have come under particularly heavy fire.... [P]ayday lenders typically offer short-duration loans of several hundred dollars secured only by a post-dated personal check from the borrower.... Many borrowers... quickly get into financial trouble once they begin to roll over their payday loans.... The problem is that many people have difficulty weighing the trade-off between immediate benefits and future costs. When confronted with easy credit access, some inevitably borrow more than they can reasonably expect to repay. Once they get in over their heads, they borrow more....

[E]asy credit... is more like heroin and cocaine than alcohol. This evidence recently led Congress to cap the annual interest rate on payday loans to military personnel at 36 percent. In New York and 10 other states, similar restrictions apply to loans to the general public, in each case making payday lending effectively illegal.

Those who feel that payday lending is a bad thing are inclined to vent their anger.... But outrage directed at payday lenders cannot prevent those hardships, just as outrage directed at alpha male lions cannot prevent them from killing cubs. A more deserving target would be legislators who supported lax credit laws in exchange for campaign contributions from lenders -- or, better still, those who have steadfastly resisted campaign finance reform.

I somewhat disagree: there is something wrong with somebody who goes into a business where what you sell--in this case, extremely expensive credit--makes your customers worse off.

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