As we have discussed in previous blog posts, financial regulation is a hot topic this year. Apparently, there are four different bills currently pending in Congress that would cap payday loans at a 36% APR (or slightly more). In the past two years, many States have enacted laws that impose similar caps on payday lenders. The response? Many payday lenders are shutting down in those States.
Recently, in an article published in the Financial Times, two prominent economists asked: "Does it make sense to jump-start some credit markets and pull the plug on others?"
Their answer? Only if some types of loans help people and other types harm them. In theory, it can go either way. Under traditional economic models, more choice is better. Indeed, this logic underpins the worldwide movement to fight poverty by increasing access to (often expensive) credit.
According to the Economists (Dean Karlan and Jonathan Zinman, professors of economics at, respectively, Yale University and Dartmouth College), restricting supply does not restrict demand. While the wrecking ball may hit payday lenders, history suggests that other credit providers – from banks to utilities to loan sharks – will emerge from the destruction with ways to provide even more expensive loans. You can read the whole article here.
So, as you learn more about the 4 bills pending, think about what types of credit providers will swoop in to take advantage of the void left when payday lenders shut down.
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