Does predatory lending rise when other credit contracts?

By Felix Salmon
January 6, 2010
Megan McArdle writes that access to credit is good for the poor:

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Megan McArdle writes that access to credit is good for the poor:

Damon Runyon didn’t just make up the crowded living conditions, the loan sharks, the reliance on pawnbrokers. Those are relics of that golden bygone era when bankers didn’t extend credit to people without solid incomes, substantial assets, or affluent relations. Fewer people got themselves into trouble with a bank, it is true. But there are a lot of worse ways to get into trouble. And as with the War on Drugs, I’m pretty strongly averse to more paternalistic policies which improve the lives of the middle class while making poorer people worse off.

Megan won’t be surprised to learn that I too am averse to policies which make poorer people worse off. But I’m not at all convinced that tightening rules on credit has that effect. Indeed, it seems to me that payday lenders and the like positively thrived during the credit boom — much as India’s moneylenders have thrived and grown even as microfinance institutions in the country have done likewise.

So is there less predatory lending now, from loan sharks and payday lenders and the like, than there was in Damon Runyon’s day? I’d love to see some numbers on that — as opposed to anecdotes from an author who specialized in chronicling the criminal underclass.

Comments
8 comments so far

I think predatory lenders thrive in a bad economy, not when credit contracts per se. People who go to predatory lenders and usually bad credit people who need the money because cash is running low (maybe lost a job or livelihood is doing badly). People who go to predatory lenders are people shunned by banks, whether the economy is in credit expansion or contraction.

Posted by rogueecon | Report as abusive

Agreed. It’s very hard for me to imagine someone who would depend on payday lenders and pawn shops for whom a credit card or a mortgage would be a salvation. I think at that level we’re talking about either people who need to avoid credit until they improve their economic situation or people who need charitable assistance to get out of persistent poverty.

We can talk a lot about what sort of charity will be socially beneficial, but I don’t know why we would want our for-profit banking industry to take on this role. If someone doesn’t have enough money for food/medical/housing expenses, how is adding high interest charges to the mix going to improve their long-term economic position? If what they’re buying is discretionary but their income can’t support it, why would we want to encourage a bank to lend in support of this consumption?

Posted by najdorf | Report as abusive

I confess to never having been inside a payday lender, but I grew up in the lower economic strata, and to me banks were imposing and scary buildings. If a payday lender looks like a regular storefront, I might feel more welcome and comfortable doing business there than in a granite-fronted edifice. And it wouldn’t even occur to me to compare costs.

Posted by Curmudgeon | Report as abusive

Having spent some time in Michigan, with almost its entire population being essentially red-lined, it occurs to me that statistics from which much may be learned are regional and national Western Union business activity volumes.

Western Union may not be directly within the predatory lending sector, but arterially positioned alongside the pulse of what happens when all the credit (along with just about everything else) is sucked out of an economy, with everyone scrambling to put that last bit of cash wherever it’s most needed.

When banks and predatory lenders become morally indistinguishable from one another, class-conscious authors like Runyon remain educational, too.

Posted by HBC | Report as abusive

Curmudgeon, not only are banks imposing and scary buildings, but they simply aren’t available to everyone. Most banks have a minimum requirement of several hundred dollars to open a checking or savings account.

Even once you have an account, the available services will probably not be the ones needed. Very few banks are willing to make payday-type loans of a few hundred dollars to be repaid in a couple of weeks – except of course through the mechanism of “automatic overdraft protection,” which has (when you work through the math) the same sort of interest rates as payday loans, but is not regulated as a loan since it is a fee.

Posted by KenInIL | Report as abusive

Curmudgeon and KenInIl are industry sock-puppets who magically appear every time someone writes something negative about the payday predators.

Curmudgeon,

Bullshit. That sort of condescension is of course rampant among industry lobbyists, but it’s utter bullshit. Lower-income folks typically eschew large commercial banks not because of the initmidating granite edifices, but because they’re simply not as quick about getting these folks their money as are payday lending (and similar) outfits.

KenInIl,

Overdraft fees are, indeed, harmful to consumers; but that’s a hardly a ringing endorsement of the equally harmful small lending products to which this post alludes. Current iterations of both products should be regulated out of existence.

Posted by Advocate | Report as abusive

Ken: Your first paragraph is simply not true. Bank of America offers a no-minimum, no-fee account nationwide, available online. So does ING Direct. So does at least one local bank in most places.

As to payday/overdraft lending, I’ll repeat: if you have NO money today, debt you have to pay back in a few weeks is not the solution to your problem.

Posted by najdorf | Report as abusive

Advocate, I don’t think I’ve even posted on payday predators before, and I would certainly never defend them. See for example my reply to the post just before/after this one, with Felix’s two examples of loan terms by these organizations. What I was wishing was that legitimate banks would offer a better range of services for people who don’t have much money.

In regards to that, it is good to see najdorf’s post; I had not know that BofA a no-minimum no-fee account — although, poking around their site, the only such account I found requires that you open the account on-line, which may not be possible for some people. And, although I agree in principle that a person living from paycheck to paycheck should not be borrowing money, there really are times (medical problems or car breakdowns, for example) when they need to borrow short-term, simply so they can get to that next pay check.

Posted by KenInIL | Report as abusive
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