In his latest column, Thomas Sowell covers payday lending and some of the muddled thinking around it. Sowell addresses a statement made in a news article:
According to the reporter: “In California lenders charge up to $45 in fees on a maximum $300 loan. This amounts to an interest rate of 460 percent, trapping some borrowers into a never-ending cycle of debt.”
Let’s take this one step at a time. Whatever the merits or demerits of the rest of the argument, $45 is not going to trap anyone in a never-ending cycle of debt, even if they are making only the bare minimum wage. Personal irresponsibility in managing money can trap anyone, but that is regardless of whether or not they take out payday loans.
Now to the 460 percent rate of interest. You don’t need higher math to figure out that $45 is 15 percent of $300. How did we get to 460 percent? Very simple: By distorting the actual conditions of most payday loans.
As the name might suggest, payday loans are short-term loans to tide people over until they get their next check, whether a salary check, a welfare check or whatever. Payday loans are relatively small sums of money borrowed for very short periods of time, often by low-income people who want some cash right now, for whatever reason.
Is it worth paying the $45 to get the $300 right now, rather than wait a couple of weeks for your check to arrive?
No third party can know that. But taking decisions out of the hands of those most directly affected is one of the central patterns of the political left that make them dangerous to the very people they think they are helping. This is not idealism. It is arrogance — and too often, it is ignorant arrogance, as in this case.
The 460 percent figure comes from imagining that the borrower is not just going to borrow the money for a couple of weeks, but is going to keep on borrowing every couple of weeks all year long.
Using this kind of reasoning — or lack of reasoning — you could quote the price of salmon as $15,000 a ton or say a hotel room rents for $36,000 a year, when no consumer buys a ton of salmon and few people stay in a hotel room all year.
Say what you will about payday loans, but the last paragraph really brings it into perspective. I’ve stayed in many $70,000 – $90,000 per year hotel rooms.
I haven’t taken a payday loan myself and don’t plan to.
Most of the people who criticize payday lending haven’t either, which makes them awfully presumptuous to want to make decisions on behalf of people who do use payday lending.
Maybe they should find some customers of payday lending and ask them a few questions. When was the last time you took out a payday loan? How often do you do it? Why do you do it? What would you do if you didn’t have a place to get a payday loan?