Money Chronicles, Volume 2: Don't Blink or You'll Miss My Libertarian Moment

Anyone who knows me know that I am an unabashed liberal. I almost always vote Democrat and I support almost all of the financial regulatory reforms that are currently in the news.

On the other hand, I’m finding that I can’t support additional regulation of the payday loan industry. For the uninitiated, it’s a small loan given over a short period of time. Let’s say you’re getting paid in 5 days but need $100 right now. They will loan the money to you and you pay it back with interest when you get paid in 5 days. I heard a story on this recently on NPR’s Planet Money blog. They interviewed a guy who works at one of these places and they charge $1.50 per day per $100. If you borrow $100 today and pay it off in 5 days, you’ll owe $107.50. It’s actually pretty simple.

The problem is that many, if not most, don’t use it this way. When they come back the don’t have the $107.50; they may pay $7.50 and “roll over” the loan. It’s not hard to see how this can go south in a hurry and the payday industry is happy to keep charging you $1.50 per day until you pay it back. Turns out it works out to an annual percentage rate of over 500%. Of course, these loans aren’t supposed to be annual; most are weekly or monthly.

But it’s easy to demonize these lenders. With the current hue and cry to add regulations to banks, brokerage houses, and other institutions, payday lending houses are getting caught up. But there’s a difference: unlike the mortgage lending crisis nobody is lied to. These lenders tell you up front how much they charge and when you need to pay back the loan. There are no hidden fees, variable interest rates, balloon payments, or fine print.

OK, so here’s my libertarian moment: should we ban or regulate them only because some (ok most) people who use them are burying themselves? Do we really need to parent these people by not giving them advances on their allowances?

Those who support regulation point to issues like smoking bans or seatbelts and say this is the same thing. But it’s not. We have smoking bans because nonsmokers like me don’t have to breathe the air. We have seatbelts so people are less likely to be gravely injured where they will be supported in nursing homes but all the taxpayers of the state (motorcycle helmets are in this category too). But people who drive themselves into unmanageable debt don’t hurt anyone but themselves.

True, they hurt loved ones with this debt, but so do addicted gamblers. We don’t protect family members (even children) from gambling or alcohol addiction. Neither should we for this.

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