Payday advance lenders compete for price when allowed

Coal mining

Price ceilings, like rate caps on payday loans, can create business margins that make coal mining look comfortable. Image from Wikimedia Commons.

Some people have the idea that the payday advance industry does not compete for prices. In fact, many suspect lenders collaborate to keep prices and profits high at the expense of consumers. This case has been argued, citing the near uniformity of the price of the typical payday advance. However, those who make these claims have clearly not done their homework.

Fiction of non-competing payday advance lenders

One of the constant criticisms of the payday advance industry is that lenders do not compete for prices, not even with payday loans open on Sunday. The Consumer Federation of America asserted in a study that payday lenders, if not put under a vigorous rate cap, will charge the maximum amount allowable. The study in question looks at prices charged on cash advance loans in Colorado, which has a rate cap on the fees that can be charged. However, that study does not address why payday loan fees are so close to the legal maximum.

Price ceilings

Most states that allow payday loan lenders to offer payday advances to borrowers also impose a cap on rates and fees. Typically, the cap imposed on loan lenders is between $15 to $20 on every $100 loaned, which is called a price ceiling. The idea is that this keeps prices from being too exorbitant. However, price ceilings that are too close to the break-even point, where no money is lost, ensure that a business has to charge close to the ceiling in order to barely make a profit, never mind keep the doors open. Not only that, but a price ceiling that is too low, according to Wikipedia, also ensures the black market will enter the picture.

Someone skipped Econ

Price ceilings are part of rudimentary economics taught at the high school level. Forgetting the basics of how the world works to try to make a moral point is farcical at best. You can read more in the Payday Lending Facts and Statistics Report on Personal Money Store.

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