It’s easy to get a quick loan for an emergency or unexpected expense, right? Not so fast.

The biggest criticism of small-dollar lending (sometimes pejoratively called “payday” lending) is that high-interest rates make them predatory, especially for disadvantaged people who tend to be unbanked or underbanked. The assumption is that possessing a bank account will solve financial problems.

A middle-class married father put that assumption to the test by seeking out a short-term loan from several major banks. Top-notch credit, a good job, solid work history, and a bank account with the lending institution all should have weighed in his favor. This applicant was well-qualified on paper, so why was he turned down three times?

In the report, “No Loan for You!,” co-authored by D. Dowd Muska & Patrick M. Brenner, president of the Southwest Public Policy Institute, Brennner explained his experience trying to seek short-term, small-dollar loans as a banked American. 

Brenner approached three different national banks in Albuquerque, New Mexico. His experience across all three was identical: He was stonewalled, forced to spend money to become a customer, and then still denied.

Here’s his first experience:

“We don’t offer these loans in branch,” said the manager. “You’ll need to apply online.” “But I don’t have an account with online banking access,” stated Patrick. “Then you’ll need to open a checking account.”

Brenner noted:

After visiting these three branches, it became clear: the lauded “consumer-friendly small-dollar loan products” offered by the big banks were anything but consumer-friendly. In the end, no smalldollar loan was offered.

With an excellent financial history and access to revolving credit, Brenner was denied. We can only surmise how much worse the experience would be for a person without his level of income, work history, or credit score.

Financial services offering access to short-term loans for those who operate outside of the traditional banking systems are important facets of our financial system. They serve a customer base that traditional banks do not. Online lenders make access to small-dollar loans even more convenient. 

For many reasons, people choose to be unbanked and it is their prerogative. They opt for non-bank financial tools such as small-dollar loans when they need cash in a pinch. These people tend to be younger, low-earners, and non-college graduates. Most commonly, they are white women, but minorities have the highest rate of borrowing according to the report.

Problems emerge when policymakers–sometimes well-intentioned–interrupt the free market to put their finger on the scale in favor of some businesses and against others. As the report notes, there has been no shortage of criticism and legislative efforts such as capping interest rates. The unintended consequences have been to funnel people into alternatives that may be more costly such as pawnbrokers, overdraft fees, and even loan sharks.

Clearly, rate caps on small-dollar, short-term loans hurt more people than they help. The authors conclude that the role of policymakers should be to ensure that consumers–banked and unbanked–have access to many options so they can secure the funding they need:

Policymakers in the Land of Enchantment should replace virtue-signaling regulation with “rules of the road” that foster greater competition in financial services. Clear, consistently enforced standards can ensure that the lending market is open to all providers, while at the same time protect consumers. To truly aid the state’s middle- and low-income households, the goal should be increased choice, not the inhibition of nontraditional credit options. Ideology and optics are no substitute for a healthy marketplace.

We agree.