The Negative Repercussions of a Payday Loan Ban
Let’s say certain consumer advocate groups got their way; what would the effects of a payday loan ban be? Certain demographics would lack access to credit (though some assert harmful credit), or would use potentially worse forms, among other potential effects.
First effects of payday loan ban are denying supply, not demand
The primary effects of a payday loan ban would be shutting off a supply that many deem noxious, but not a demand. It’s been proposed for some time that the payday loan industry should be regulated out of existence, but the question posed there is what would take it’s place?
Whenever a prohibition is legislated into effect, there is often a supplication of the demand. There may be deleterious effects of cutting off said supply. In the case of financial products, more injury can be done by denying a supply of credit than by allowing it to continue to exist.
However, it does nothing to address why it is so many people needed the loan to begin with.
Supplicating the lack of supply with more onerous options is one of the effects of a payday loan ban. According to a research paper by Kelley Edmiston of the Kansas City Federal Reserve, viewable here in PDF format consumers have been observed or could resort to a number of options.
Those with credit cards could take out a credit card cash advance or possibly incur over-the-limit charges. Over-limit charge fees, often around $40, can amount to nearly 1,000 percent APR over a several-week period; no better, and in fact worse, than the effective APR charged by a payday lender.
Bouncing a check is another possibility, as doing so can function as a form of short term credit. It has been observed after strict or outright prohibitive payday loan regulation measures are passed. According to a literature review in a 2013 Washington and Lee Law Review article (viewable here – in PDF) by Paige Skiba (one of the foremost authorities on the subject), a Federal Reserve Bank of New York study from 2007 found increasing rates of Chapter 7 bankruptcies, bounced checks and FTC complaints about debt collectors in North Carolina and Georgia in 2003 and 2004, directly after both states imposed payday lending restrictions.
The average bounced check fee in 2010, according to Edmiston’s paper, was $30.47, which can top 4,000 percent APR. Bounced checks also impact FICO credit scores, and if bounced knowingly, can be prosecutable.
Among other sources of alternative credit are title lenders and pawn shop loans. Fees for both of these services can be comparable to payday loans, but these are secured loans in that they are underwritten by a lien against property. In the case of pawn lenders, it can be any trinket of value such as a television, computer, video game console or jewelry, but for title lenders it is the title to one’s vehicle. Default results in loss of property.
Other alternatives include loans from family and friends or in some cases, resorting to “loan sharks.”
Aside from use of alternatives being one of the effects of a payday loan ban, there are also other consequences to consider. Utilities can be shut off, late charges applied, or transportation can be compromised due to not having requisite funds for repairs. That can, in some cases, lead to job loss. People can be evicted from their residences.
While those are perhaps not full justifications for keeping a (as some feel) noxious credit product available, what is to take their place? Is there a better alternative, ready and waiting on as large a scale. Not for everyone. Likewise, some actual payday loan customers are known to feel that while they despise the product, not having them may be worse; a 2014 article in the New Yorker quoted a young woman currently paying off some recent loans as saying the same thing, besides mentioning that others felt the same way.
Payday lending serves a need. It may do so in perhaps not the most angelic way, but it does. The need will not dissipate if one method for fulfilling it is taken away.