Congress recently put a cap on the amount of interest on loans private companies can legally charge U.S. service members. The measure effectively makes “payday loans” to military personnel illegal. This is has some, including Washington Post business columnist Michelle Singletary, calling for a ban on all payday loans, which she finds distasteful and predatory.

Makes you wonder if Singletary has ever been the position to need this kind of loan. Yes, the interest rates are exhorbitant (typically 15 percent or higher for just a one or two week loan). But these companies are lending to customers who need a few hundred dollars to make rent, or to pay utilities. A high percentage of them are likely going to default. Which means the companies themselves need to charge high interest to offset the scofflaws. Not to mention that the short-term and low-dollar nature of the loan likely requires higher-than-normal interest rates just to cover the costs of processing it.

Distasteful as Singletary might find it, there are obviously people who need short-term loans. And there are companies willing to provide them. The market has worked out an equilibrium where loaner and debtor both get what they need. Where’s the problem? Would it be preferable if people couldn’t get these types of loans, and were instead evicted, lost utilities, or couldn’t pay for medication? Does Singletary expect other companies to step up to grant these loans at lower rates, assuming losses?

This entry was posted on Saturday, October 14th, 2006 at 1:41 pm by Radley Balko and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.