Payday loans are bad. They charge high interest rates, target the poor and can leave people in worse financial distress than when they started. But they are a necessary evil. If you are poor, you have bad credit. Banks won't lend you money. Credit cards are overdrawn or non-existent. One lives paycheque to paycheque or worse. So what do you do when the kids need medicine, or the furnace breaks, or the car you need to get to work throws a rod? You go to a payday loan operator and get money that you need today. Yes, it is at high interest rates, and that could leave you running to stand still. But if the transaction is transparent, if the costs are disclosed, if an adult enters into a contract with full knowledge of the costs, then they should be allowed to do that. Because the alternative to micro-credit lending like payday loans is unregulated lending: - Pawnshops, where people put up their own assets as collateral for a loan, potentially losing a TV set worth $200 bucks to get twenty dollars at high interest rates. - Title loans, where you put up the title to a car as collateral for a loan, potentially losing a car worth $2000 to get two hundred dollars at high interest rates. - Loan sharks, where you put up your knees as collateral for a loan, potentially having them broken if you don't make the high interest payments. As such, a recent report to the Ontario government on payday lenders is a mixed bag. I have no problem with capping interest costs so that borrows are not turned into beggars by usurious interest rates. But this report recommends that identifiable classes of people, like those on social assistance, should not be allowed to borrow money this way. I have a major problem with that. To say that "certain people" should not be allowed to borrow money is exclusionary and leaves the most vulnerable in a position where they must turn to unregulated lending or even loan sharks. If I am a responsible person living on disability support or worker's compensation or social assistance, why should I not be able to sort out my own finances and borrow where I need to? The rate of interest must be regulated closely and capped at an appropriate level. Back-to-back loans should be banned, since they only lead people to borrow to make interest payments on their first loan. Most importantly, demand complete transparency. Ensure the total cost of borrowing is made perfectly clear. Force payday lenders to post their rates and to spend time walking people through the implications of their decision to borrow. Most of these actions were taken in the past, or are recommended in this recent report. But to point to a class of people and say "they are too poor to be allowed to make decisions for themselves" smacks of the worst kind of paternalism. The villains here are not the payday lenders, though they are no heroes. The villains are the large-scale institutional lenders like banks who refuse to extend credit to those with low-incomes in Canada, especially considering the same institutions do extend that credit to American customers. For example, in the United States, the Royal Bank undertakes major community investment initiatives because of the Federal Community Reinvestment Act. This Act received some bad press lately. The pressure it places on financial institutions to lend to those with low-incomes got some blame for the current recession. But the true source of the mortgage meltdown turning into a financial crisis was the securitization of any bad debts it created and the ponzi-schemes that financiers then played with those bad debts. Here is an easy-to-follow explanation of that process. When the federal government downloaded payday regulation to the provinces in 2006, they washed their hands of any obligation to force banks and other large lenders to undertake community loans. That is the only true solution to the problems faced by those with low incomes of getting access to credit in an emergency. The question fundamentally is this: When people need money what role should the government play in regulating that transaction? My belief is the government's role in regulating financial services is fundamentally one of ensuring transparency and honesty. If everyone knows the consequences of their decisions, and they are spelled out clearly, then we should all have the freedom to make those choices for ourselves. Banning a class of people from certain financial transactions robs them of the ability to decide for themselves. And that is just wrong.
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