There's really just no way of loaning small sums for short periods of time that isn't, when calculated as an APR, expensive. Given the way that APR is calculated they had to charge in the region of 260-280% interest (ie, including those arrenmgent fees when callculated on an annual basis) just to break even. Goodwill tried this out a few years ago and they tried to run a payday loan experiment as a non-profit making exercise. Secondly, the entire adminstration of such loans is expensive. There's just no real way around this: lending small amounts of money for short periods of time is expensive for this very reason. But, the way that APR is calculated means that that cost looks like interest. And that minimum cost is going to be larger as a portion the smaller the loan is.
There's a certain irreducible cost to making the decision about whether to offer a loan or not. Firstly, that the loans are short term and of small amounts.
But obviously part of the reason that people are so against these loans is those interest rates of 300% and up. There's nothing at all wrong with insisting that people know, even understand, what they're getting into. The Consumer Financial Protection Bureau says state laws governing the $46 billion payday lending industry often fall short, and that fuller disclosures of the interest and fees - often an annual percentage rate of 300 percent or more - may be needed. And this will of course justify both the creation of the organisation and also the effort that Elizabeth Warren put into making that creation happen. Only that they're going to be different so that the new organisation can say it has done something. Do note that I didn't say that the new rules are going to be better, nor necessarily that they're going to be worse. It was always obvious that the regulations would be different after the creation of the Consumer Financial Protection Bureau than they were before. The surprise here is of course that if a new regulator had been created, looked at the problem then concluded, well, that's fine, then for what purpose would the new regulator have been created? And that's not the way to make it to the the corner office now, really, is it? The new regulatory body with responsibility at Federal level for things like payday loans has decided that the current, state-based, regulations for payday loans are not strong enough.
My word, this is a surprise for connoisseurs of regulation and public choice economics.
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