I read an arcticle in a small local paper here titled, “Cashing an Empty Paycheck”. The article talked all about payday loans in Washington state. They highlighted a person named Sonia who would write a post dated check for $795 to receive $700 in cash. It turns out that this is the maximum amount of money that someone can get from a payday loan company. I found a few of the statistics in the article staggering. Here are a few of them:
-The maximum allowed interest rate for these loans in Washington state is 390%. Yes, you read that right. 390%!!!!!
-The average payday loan is $378 with a 15% charge to borrow the money (for a matter of a couple weeks. That’s pretty steep interest)
-In Washington state, over $1 billion in loans were handed out last year.
-Between 2000 and 2003, the amount of total loans increased 84%
I think the thing that I really don’t like about these is that they pull people in and put them on an endless cycle of debt. These loans certainly aren’t in the best interest of each consumer. Traditionally, you can find these types of establishments in the poorer areas of town. I read an article awhile back that says they are starting to pop up in more affluent areas as those people find themselves deeper and deeper in debt to support a lifestyle they can’t afford.
This raises a fundamental question about the role of government in regulating the banking industry. 390% interest is considered usery by any rational individual and is unquestionably unethical if not illegal. Should the government prohibit commerical enterprises from engaging in such dispicable behavior or should we let the market run it’s course and allow individuals to freely enter into contracts as they see fit? The libertarian and humanitarian inside me are at odds.
I vote for the libertarianism. We can’t go around shielding people from their own ignorance. If that were the case, most people wouldn’t be allowed to drive, vote… I do think there should be more of a push to educate people about finance, but in the end, if someone wants to rack up a bunch of debt, it’s not the government’s place to stop them.