It should come as no surprise to anyone that there is a move to use the coronavirus crisis to shove a cap on short term loans, also known as payday loans.

The elites hate these loans. The misnamed Consumer Financial Protection Board (CFPB), a Senator Elizabeth Warren brainchild, declared war on the short-term loan business, calling for regulations that would drive many of them out of business. Which of course was the point.

With Democrats seeing the crisis as a golden opportunity to put in place policies that they could not achieve in normal times, the progressive Indiana Institute for Working Families (IIWF), is calling for a 36 percent ceiling interest rate on these loans.

A coalition of like-minded groups has joined Indiana Institute of Working Families in supporting state-level bills to impose the 36 percent limit. IIWF has also sent a letter to Senate Majority Leader Mitch McConnell and Minority Leader Senator Chuck Schumer urging the limit.

They write that “consumers and small businesses that are starved for cash should not be gauged [sic] by unscrupulous lenders.” A 36 percent ceiling would close down a lot of short-term lenders.

While that may be just fine with progressives, it will harm many people who don’t have access to bank accounts, bank loans, and credit cards but find themselves in a pinch.

Short-term lenders’ high interest rates reflect the riskiness of the loans they are willing to make. Banning payday loans will cut off a source of emergency cash to some people in dire need.

In 2008 a New York Federal Reserve study compared how households managed in two states that allow payday loans and two that don’t. The Wall Street Journal explained what the study found:

Compared with households in states where payday lending is allowed, the study found that Georgia and North Carolina households had “bounced more checks, complained more to the Federal Trade Commission about lenders and debt collectors, and filed for Chapter 7 bankruptcy protection at a higher rate.”

The researchers concluded that payday credit is preferable to alternatives such as bounced-check protection from banks or loans from pawnshops.

We hope you have a credit card with a high credit limit and an enormous bank account. Some people have neither.

Deciding to take out a loan is serious business, but let’s let consumers make that decision for themselves. We believe that people are able to weigh taking out a high interest loan against the alternatives.  

More information about misconceptions of short-term loans here.