A little knowledge is a dangerous thing. And that's why Rep. Gordon Hintz's misguided campaign against short-term payday loans in Wisconsin is so troubling.
Hintz's proposed interest-rate cap would eliminate financial options valued by thousands of Wisconsin families, while doing nothing to address the state's real problems of unemployment and economic recession.
The argument for a ban rests on two key -- and incorrect -- assumptions:
• That the consumers who get these loans are somehow being "tricked" into borrowing.
• That the interest rates on payday loans cause more financial problems.
Proponents of an interest-rate cap suggest payday borrowers are clueless, unaware of the cost of their loans and unable to make decisions for themselves. A new study from economists at the University of Chicago has shown the opposite is true.
The researchers went into payday loan stores and gave prospective customers information comparing the loans to other options, as well as explaining that renewing a two-week loan repeatedly could be quite expensive (just like taking a taxi from Madison to Green Bay is probably not a good idea).
The result? Nine of out ten borrowers got the loans anyway because ordinary people already know how to evaluate their options.
Those options, by the way, aren't great. For cash-strapped consumers in this economy, one of the most common ways of getting short-term cash is overdrawing a checking account. But with an average fee of $27 -- even if the triggering purchase is a $3 cup of coffee -- overdraft fees are potentially the most expensive form of credit imaginable. They are about 45 times more expensive than a payday loan in the example above.
And credit card late fees are no better. Paying late can incur a $39 charge, plus triggering interest-rate hikes on other cards. So how is banning payday loans supposed to help consumers? By steering them toward bank overdraft fees?
Many studies have looked at the effects of banning payday loans, using real data from states where the option has been outlawed. A Dartmouth College study in 2008 concluded that a payday loan ban in Oregon compelled consumers to use "inferior substitutes," and that "borrowers' financial conditions suffered as a result." A report from the Federal Reserve Bank of New York found that bans in North Carolina and Georgia led to an increase in bankruptcy filings, as well as bounced checks and outrageous overdraft fees.
Echoing those findings, a joint report by researchers from George Mason University and Colby College found that banning payday loans "harms the very people whom consumer interest groups and their political allies are trying to help."
Hintz himself recently gave one of the best arguments against his own proposal, saying: "Especially in this economy, one of the most effective things we can do is to help people keep their dollars in their pockets."
Hintz is absolutely right: We should help people keep their money, and the way to accomplish that is by giving them more options, not by restricting choices and forcing them into more expensive alternatives.
Longwell is the director of communications at the Center for Consumer Freedom in Washington.