Should The State Protect You From Making Bad Choices ?

The Virginia General Assembly is debating a number of bills that would regulate, and in some cases nearly eliminate the pay-day loan industry in the state based upon the belief that the loans’ high interest rates take advantage of lower-income citizens:

The rite of borrowing modest amounts of cash against a future paycheck — known as payday lending — has become an increasingly popular practice for working families in Washington’s suburbs. It has also become big business across Virginia.

But the routine is under increasing scrutiny in the commonwealth, where a broad coalition of religious and consumer advocacy groups say they are concerned that the practice enables low-income earners such as Reyes to unwittingly take on more debt than they can handle. They are joined by a bipartisan group of lawmakers in the General Assembly that wants to reverse a 2002 law that eased restrictions on the payday loan industry.

There’s no denying that pay-day loans can be expensive for the people that enter into them. Depending upon how long the loan is outstanding, the effective interest rate can be as high as 390 percent or more, but when you consider the fact that the people who are serviced by this industry typically have bad credit, low income, and few assets, it’s not all that surprising that they would be charged high interest rates for a loan. Moreover, as the article points out, they a really don’t have many other alternatives:

Interviews with more than a dozen customers in Northern Virginia over the past week found that many have come to count on the access to easy money if they are in a pinch, although several admitted they sometimes took out one loan to pay another.

Percy Jones, who works as a chef, among other jobs, and who recently moved to Dumfries from South Carolina, said he has several outstanding loans to payday centers. He said he was waiting for a check from his previous job to be able to pay everything off. The District native added that he has tried to avoid relying on payday lending, but having four teenagers to support on a modest $32,000-a-year salary forced him to cut corners.

“I can see how people would see this as bad, but this is how I’ve had to scrape by,” he said.

He added that in some cases he has paid one loan off with another, but always knew he had money coming in the future that made him secure. He expects to take out more over the coming months because life in Northern Virginia is more expensive than in South Carolina.

“It’s a way of life for some of us,” he added, counting several $20 bills as he headed to a brown Chevrolet. “It would be better if it wasn’t, but, frankly, it’s like an addiction.”

You can question the wisdom of Mr. Jones’ decision to enter into a payday loan, or even his decision to move to a part of the country with a much higher standard of living, but it is his choice. What right does the state have to say that he can’t make it ?

Further thoughts over at Atlas Blogged

  • Brad Warbiany

    I had a friend in college who regularly used these services… Pretty much each paycheck went to pay his previous loan, at which time he took out a loan on his next paycheck. It was pretty ugly, because the fees and interest were taking a hefty chunk of each check.

    But what happens if these places are legislated out of existence? Do these folks go back to the loan sharks? I think their collection methods are a little more draconian than payday loan companies…

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  • jay

    Brad is right; the need for short-term cash won’t go away, even if payday lenders are forced out of business. Then, borrowers will go to the Internet, with no regulation or safety net for consumers. Lenders who abide by the law (and self-imposed industry standards) are a better option for consumers than having no choice but to go “underground” for cash. If we let government legislate away anything that has risk potential, there wouldn’t be many businesses left. And yours may be the next to go.

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