Is the regulation of payday lenders justified?
Slate has a piece up describing the results of new research from the University of Chicago on payday loans:
So presenting borrowers with a clearer explanation of how costly it will be to carry the loan might save some folks from falling into the payday debt trap. But what about the other 90 percent of borrowers, who even when presented with evidence of the long-term costs still took the loan? For many of these borrowers, no amount of information will deter them. These may be candidates for what Richard Thaler and Cass Sunstein call a “nudge” out of payday borrowing. Economists Dean Karlan and Jonathan Zinman have proposed just such a nudge: mandating a cooling-off period before a payday loan clears to discourage impulsive borrowers (though this runs somewhat counter to the purpose of a payday loan, which is for people who need money now).
Is Karlan and Zinman’s proposal justified?
This proposal is philosophically distinct from the “nudge” the author references. The classic “nudge” is auto-enrolling employees in a retirement savings plan. Doing so does not impose any particular burden — a decision needs to be made at this particular inflection point (to enroll or to not enroll). Participants can, of course, choose to dis-enroll in the program at will. The program reaches a socially optimal outcome without compelling or preventing action.
The situation is different in the case of the proposed payday loan cooling-off period. Karlan and Zinman would have the government prevent borrowers from doing what they have already chosen to do, that is, get money now regardless of the costs. Cooling-off periods might be justified for activities such as buying a handgun, because the danger is that the weapon will be used to harm others. However, it is not clear that payday loans harm anyone other than the borrower, and certainly not to the same violent extent.
Regulation of this market places a clear imposition on a freely-determined course of action; it’s not clear what philosophical principle could justify this restriction. Thoughts?
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8 Responses to “Is the regulation of payday lenders justified?”
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This is a hard one- there’s no doubt these products exploit people. On the other hand, there’s no question that these people are fucking stupid.
In the sense that mitigating the corrosive effects of poverty, these products should be regulated or even prohibited. I almost feel like an argument can be made: If you’re stupid enough to use these facilities, you’re too stupid to be trusted with your own financial well-being.
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