Payday Loans Aren’t a Problem, Student Loans Are – The Republic of Minnesota
I think most can agree that when it comes to borrowing money – and lending it, for that matter – everyone should be treated fairly.
Recently, various politicians across the country have taken on payday lenders by calling for loan interest rates to be capped at 36% or even 15%. in some cases, politicians have decided to revoke and ban the business licenses of payday lenders altogether. Their motivation is to prevent consumers from incurring insurmountable debts. While well-intentioned, interest rate cap policies would make payday lenders unprofitable and thereby eliminate what is often the only source of credit available to many Americans.
Instead of attacking the payday loan industry, which almost no real consumer complains about, policymakers should focus on what is America’s real debt crisis: student loans. Why are policymakers ignoring student debt and focusing on payday loans? It’s politics. Payday loans offer easy sound clips about interest rates and vulnerable consumers; student loans appear to serve a noble purpose for upward mobility youth.
What exactly are payday lenders and why are so many politicians pushing to restrict them? A payday loan is a loan in the amount ranging from $ 50 to $ 1,000, the average being $ 350, according to Experian.com. Borrowers repay the loan in full, plus the interest rate, usually within 14 days.
These types of loans are usually taken out by people who are strapped for cash and need money for an expense before their next paycheck, people who, without this credit, would otherwise be unable to afford an unforeseen expense. Four in ten Americans don’t have the savings to cover an emergency expense of $ 400, according to the Federal Reserve Bank. Some examples: a necessary car repair, a medical emergency, or a security deposit on a new apartment.
Some policy makers claim that payday lenders are predatory in nature, taking advantage of those in need. Chase Carlisle, a member of the Memphis, Tennessee city council, who recently sponsored a resolution to ban payday lenders, says, “People need help, and these lenders are taking advantage of it, so we have to do what we do. can to remove them from our community.
Carlisle is right about one thing: people need help. Yet most of the time, the only financial help they can get is from a payday lender. In fact, 42% of people have unprivileged credit scores and therefore often resort to other forms of credit. For these consumers, payday loans offer privacy, speed, convenience and flexibility.
The keys to good consumer financial policy are inclusion, access, innovation, and strict regulation – not restrictions – for the 42% of Americans who are not credit-rated.
It should be noted that payday loans often serve as a vehicle for people with unprofitable credit scores to establish or increase their credit scores – a benefit that provides long-term dignity and goes beyond short-term need. to pay the bills.
The stated goal of policymakers to prevent consumers from experiencing financial hardship and getting into debt, if real, is noble. The point is, however, that this is a debt that consumers take with their eyes wide open, as adults payday borrowers understand very well what they take on for a short and predictable period of time. Thus, they should be able to make their own informed decisions based on their specific needs, without the government limiting their credit options.
The irony of this is that lawmakers are spending so much time and energy on short-term personal loans that they completely ignore the elephant in the room and the real problem they should be solving: student loans.
Unlike the payday loan market, where borrowers know exactly how much they need and exactly how much they will need to pay off in a matter of weeks, the low-restrict student loan market serves consumers who often take out loans at low cost. blindly and have no experience of debt.
Student loans are arguably taken out by the most ignorant consumer group in the country: university students. By being one myself, I can attest to this. All too often, students run into huge debt without being properly informed of the decision. Honestly, student loans are the most widely used consumer credit product to take advantage of people.
Although the interest rates on payday loans seem high at 36%, this is actually not everything, as the interest only accumulates over a few weeks. Student loan debt, however, accumulates over many years, sometimes decades. The total interest over the life of a student loan for an undergraduate student is typically well over 100% and can often be as high as 300%. Students rarely think about the overall cost of a lifetime loan, because repayment seems so far away.
To further compare the two issues, student loan debt now stands at $ 1.6 trillion, according to CNBC, and 44 million Americans are burdened with that debt. On the flip side, 15 million Americans resort to small loan amounts, with a total debt load that is absolutely eclipsed by student debt.
This is not to say that policymakers should focus on eliminating student loans or that student loans are a bad thing, because, again, inclusion and access are important keys to all good. consumer financial policies.
Thus, policymakers should ensure access to all types of loans, including payday loans, and devote some energy to alleviating the student debt crisis.