Only Leeches Hurt

13 June 2005



Payday Loans Restricted in Illinois

For a person with no credit and no savings cushion, it seems almost too good to be true. With a simple form faxed to a lender, a person in desperate need of funds can have them in his checking account by morning. And one’s next paycheck is the collateral. Such a deal – until one reads the fees and rates. For that reason, the state of Illinois just joining 42 other states in creating specific rules for this sort of loan.

The law that Governor Rod Blagojevich inked on Thursday puts a cap on the fees that can be charged -- $15.50 for every $100 borrowed. For some companies, that will prove a huge decrease from the $40 per $100 they were getting. Also, each loan can only be $1,000 or 25% of the borrower’s monthly salary, whichever is lower.

Naturally, some of the companies are complaining. The president of the Illinois Small Loan Association, Bob Wolfberg, said, “It will reduce our gross revenues by 33 percent, forcing most of our companies into losing money.” And maybe, he’s right. But should companies be in a business that can cause some of America’s neediest working poor (remember, there’s a regular paycheck involved) to be, in the governor’s words, “swamped with an endless cycle of debt.”

Apparently, some lenders are supporting this move. The Community Financial Services Association, which MSNBC says “represents more than half of the payday loan outlets nationwide,” has no problem with the Illinois law. Tony Colletti, senior vice president of the organization, said the new laws would prevent abuses and prevent borrowers from going overboard on the loans.

Now, the market is the ideal place for terms of loans and rates of repayment to be resolved. However, markets rely upon rational actors utilizing perfect information. That doesn’t describe a man on the night shift whose electricity is going to be cut of in two days with payday a week off. Maybe he shouldn’t have put himself in that position, and maybe he should have worked out a deal with the electric company earlier. On the other hand, if it costs him $31 to pay off his $200 bill and keep the lights on, maybe he can keep ahead of the game. If it costs him $80 to pay it off, he might not ever get even. Sometimes the best thing society can do for desperate people is to protect them from themselves and prevent that desperation from becoming permanent.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
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