Payday Loan and Car Title Pledge Loans: Unintended Consequences of Access to Credit

By | Jan 17, 2013

There is a strong argument for advising regulators to avoid restricting consumer access to credit alternatives. A piece written by Todd Zywicki and Robert Sarvis  at Mercatus.org does a good job of championing a multitude of financial products including car title “pledge” loans and payday loans. Here’s a portion:

“Well-intentioned legislators and regulators assume that restricting particular forms of credit will lead to fewer bad financial outcomes. But this is misguided and can lead to worse, not better, outcomes. Restrictions on particular types of consumer credit don’t necessarily induce consumers to refrain from unnecessary purchases or to avoid bad out- comes. Consumers resort to these financing options because they have pressing needs. So repressing one form of consumer credit will often only lead to a shift to other new or existing forms of consumer credit offered on less favorable terms for consumers. Restrictions on payday lenders might simply turn them into title lenders, as they seek to make up for caps on fees and interest rates by demanding collateral to reduce losses in the event of default, or push consumers to online payday lenders, which often charge higher rates than brick-and-mortar payday lenders. The ad hoc regulatory program of restricting disapproved forms of consumer credit thus has a whack-a- mole nature to it; limiting one form simply spawns a new one that avoids existing regulations.”

Read the entire article here: http://mercatus.org/publication/pitfalls-regulating-consumer-credit

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2 Comments so far
  1. Ben Martineau January 18, 2013 3:14 pm

    The key here is transparency. So long as lending companies are transparent so that the customer can make an informed decision, we should not be restricting credit. If a customer understands the loan and makes the decision to go through with it, who are the regulators to try and put a stop to that? As stated, the customers have “pressing needs.” A $20 or even $400 fee is often worth satisfying these pressing needs.

    Of course disclosure without education is useless. What good is disclosing all the facts if the customer has no idea what it all means. I believe that education is a key part of being transparent. I give every one of my customers a basic rundown of APR and how interest is calculated so they know how they are getting charged and what to expect with my title loans.

  2. Payday Loan Industry January 18, 2013 4:06 pm

    Ben, I agree with you. Full disclosure and transparency are crucial to building your business, serving your clients and sleeping at night. The demand for our financial products is inexhaustable. We don’t need to resort to “tricking” our customers into doing business with us.

    Consumer education is a grand goal. The challenge we have found is that our clients rarely have the patience for ongoing financial workshops, reading lengthly pamphlets, etc. Generally they simply want to know, “How quickly can I get a loan and what do I need to qualify?” However, we’ll keep plugging away at this for their own good :o) Jer Trihouse

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