Guest column: Payday loan bill is misguided
- PUBLICATION: Green Bay Press Gazette
- BYLINE: Mark Schug
- DATE: Friday, June 19, 2009
Not long ago, a coalition of Wisconsin legislators announced the introduction of a bill that would limit consumers' access to lines of short-term credit. The regulation will work as a price control that will have all sorts of unintended consequences for Wisconsinites.
The bill's central regulation is a ban on interest and fees that, combined, total less than two pennies for every dollar borrowed in connection with a short-term loan. This ultimately will hurt the consumers it is supposed to protect.
When a new price level is imposed by legislation, consumers will want more of the product than suppliers can provide. So in the case of short-term loans, the result of a legislative price control will be shortages in the market. At a number as low as 36 percent, those shortages will be severe.
Such legislation is the equivalent of capping the price of a gallon of milk at 32 cents. To a consumer, that might sound great, but any Wisconsin dairy farmer would be able to explain the negative consequences. And milk consumers soon would experience milk shortages — the inevitable result of setting milk prices below market rates.
The greatest damage will be done to those individuals who responsibly use payday loan services. Borrowers choose these short-term payday loan products because they have found them to be their best alternative.
Who would be helped by this legislation? Not the people that legislators are interested in. Illegal underground providers of short-term loans would pick up new customers, as would riskier online lenders.
Traditional banks would be another big winner, as their annual $22 billion in overdraft fees would almost certainly skyrocket.
Increased competition in the short-term loan market seems, on balance, to be a far better solution than government-sanctioned controls. Wisconsin's financial institutions already are bringing new products to the market. Some Wisconsin credit unions, for example, offer a new program called Real Solutions. This program offers small loans with competitive annual percentage rates.
Legislators should focus on programs that ensure Americans have the tools and information to make the best possible choices for their own needs. Although payday loans might be expensive, imposing price controls will have unintended consequences that will harm the very Wisconsinites supporters of this legislation are trying to help.
Mark Schug, professor emeritus and former director of the Center for Economic Education at the University of Wisconsin-Milwaukee, is a national consultant on economic and financial education. He can be contacted at: econliteracy@gmail.com.