"Easy Credit Access is More Like Heroin and Cocaine than Alcohol"

Are payday lenders "ruthless predators whose greed drives hapless borrowers into financial ruin"?:

Payday Loans Are a Scourge, but Should Wrath Be Aimed at the Lenders?, by Robert Frank, Economic Scene, NY Times: ...[P]ayday loan shops have come under particularly heavy fire of late. This industry, which didn’t exist in the early 1990s, now has approximately 10,000 retail outlets nationwide (more in some states than either McDonald’s or Burger King). ... Concentrated in low-income neighborhoods, payday lenders typically offer short-duration loans of several hundred dollars secured only by a post-dated personal check from the borrower. Fees on a two-week loan often exceed ... an annual interest rate of ... 500 percent.

Occasional borrowing on such terms can make sense, because it sidesteps the cumbersome process of taking out a traditional bank loan. Many borrowers, however, quickly get into financial trouble once they begin to roll over their payday loans. A recent report ..., for example, estimated that a typical payday borrower ends up paying back $793 for a $325 loan.

Payday lenders have been condemned as ruthless predators whose greed drives hapless borrowers into financial ruin. ... But ... Those concerned about the growing culture of consumer debt need to recognize that it stems far less from the greed of lenders than from recent liberalizations of lending laws. Since biblical days, societies have imposed limits on the terms under which people can borrow money. A wave of deregulation in the financial industry has eliminated many of those limits. Liberalizing credit access may have made many mutually beneficial transactions possible, but its adverse consequences were completely predictable.

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, if the law permits. It was thus all but certain that millions of society’s most economically vulnerable members would borrow themselves into bankruptcy if confronted with easy credit access. If we are unhappy about that, the only recourse is to change the rules.

Each society must decide whether the costs of easy credit outweigh the benefits. This entails trade-offs similar to those we confront when deciding whether to regulate drugs. For example, alcoholic beverages, like payday loans, inflict considerable harm on a small percentage of people, but prohibiting alcohol appears to create more serious problems than it solves. Prohibiting cocaine and heroin entails troubling side effects, too. Even so, ... most ...societies ... prohibit them.

Evidence suggests that easy credit access 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 about the hardships it has created. But outrage directed at payday lenders cannot prevent those hardships... 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.