If you had a $400 emergency like car damage or sudden medical bill, could you afford to pay it?
Unfortunately, 40 percent of Americans (and half of military families) don’t have enough saved to cover such a bill. They might turn to payday or title lending company for a quick loan, knowing they would be able to pay it back from their next paycheck.
Millions of Americans rely on lending companies for access to cash and capital when they need it, but members of Congress may shut these options down if they get their way. It will only drive our military servicemen and women and struggling Americans living paycheck-to-paycheck to turn to more costly alternatives like overdrafting accounts or late payment fees.
Today, Congresswoman Maxine Waters is hosting a hearing entitled, “Rent-A-Bank Schemes and New Debt Traps: Assessing Efforts to Evade State Consumer Protections and Interest Rate Caps.” Don’t let the title fool you. Congresswoman Waters wants to shut down the small-dollar loan industry (i.e. payday loans) by limiting how much interest they can charge borrowers to 36 percent. That 36-percent cap is applied to loans for servicemembers and she wants to extend it to all Americans.
Proponents of this cap claim this will protect borrowers from paying high interest rates that sometimes they cannot afford to repay on time. That is not what would happen.
The 36-percent cap for service members may have been well-intended by Congress but ended up cutting them off from small-dollar loans. According to one poll, a majority of military households have been denied loan products and access to credit because of this congressional interest rate cap.
We might ask why Americans and service members don’t simply go to a bank to borrow a loan or use a credit card. If you have no credit, a bad credit history, or carry a low credit score, those are not options for you. These are Americans and service members who have jobs and incomes, but still struggle to make ends meet. They just are not creditworthy for one reason or another.
Banks, credit unions, and military relief societies provide loans to almost no individuals with low credit scores (generally below 600), because they view the risk of non-repayment as too high. U.S. Bank is reportedly one of few banks willing to take that risk but they charge interest rates of 70-88 percent. However, small-dollar loan lenders are willing to take the risk and charge rates accordingly. Capping interest rates will put these lenders out of business.
Helping struggling Americans and service members gain access to cash in an emergency is a complex issue. It requires more than a simple solution of capping interest rates on small-dollar loans. Manipulating the market to limit rates or regulate how loans are structured will have unintended consequences that hurt those who need help most.
We can have discussions about why so many American households cannot afford a $400 emergency and start to address root problems behind financial strains on family budgets such as low wages and high costs of living.
At the same time, we should ensure that they have access to as many different sources of cash as possible. Let them make the best decision for themselves rather than having Washington lawmakers take away their choices entirely.