Monday, August 21, 2006

Payday loans

Steven Dubner at Freakonomics made a recent post about payday loans. It seems Congress is thinking of passing a law stopping military from getting payday loans even in those states that regulate the service. Dubner seems to think that the fees that such loan companies charge is usery. I think otherwise. Here's my comment.

You can get a $100 withdrawel at an ATM with a credit card for a couple of bucks (it’s usually going to be more than $1.38) but you can’t get a cash advance on a credit card at a teller window for that. I don’t know exactly what it is, but it’s more like $12—plus interest charges.

The transaction cost for the payday lender is fairly high, and the period of the loan is usually less than a week.

She’s right, it’s a bad law.

The ones they should pass a law about is the furniture rental places—not for their overpriced stuff and rentals which are essentially usery disguised as rental agreement, but to stop their ability to use criminal laws to collect payments. If you default on a rental agreement it’s treated as theft if you don’t return the merchandise, where default on a secured not requires civil action to recover the merchandise. That should be outlawed.

But, very small short term loans have high transaction costs and should not be treated as usery. Lenders should be allowed to recover transaction costs.


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