The Post-Dispatch featured an article this week exploring how “Payday loan dispute does not slow use.” The article focuses on several anecdotes — a mother of small children facing cuts to her utilities, a young bachelor who simply spends too much, a woman who must borrow to cover gambling losses, and an ACORN organizer who was forced to borrow to pay for groceries.

All of the anecdotes produce a visceral reaction — either one of sympathy or of strong moral consternation. It is natural to feel strongly when presented with stories of human struggle. It is foolish to immediately react to such emotions by letting slip those words, “There should be a law …”

Supporters of tighter payday loan regulations are motivated by the best intentions. They fail to recognize a few key points:

First, rates are high for a reason; they are driven by market forces. Justin Hauke, former policy analyst at the Show-Me Institute wrote:

Payday lenders charge high fees to ensure that they collect enough money from borrowers who are able to pay to compensate them for loans that end in default. If the Legislature caps payday loan rates, lenders will be forced to issue fewer of them — and then only to lower-risk creditors. And since payday loan consumers have the highest risk of default, they are the people most likely to be priced out of the market.

The effects of curbing rates, an interference with the free market, would serve to lower supply. Hauke wrote:

Several states have passed legislation in recent years limiting payday loan interest rates. Oregon passed such a law in June, arguing that it would help save consumers millions of dollars in interest. But in subsequent months, payday loan revenues have dropped more than 70 percent, and more than 100 loan establishments have closed. The result has been less access to credit for the thousands of Oregonians who rely on payday loans to offset unexpected expenses — such as emergency medical care — forcing them either to forego such expenses or seek credit in the black market.

In this light, regulation amounts to allowing the mistakes of a minority to be held up as cause for minimizing the freedom and choices of the responsible majority.

Second, better options than regulation exist, and can be pursued. If interest groups are passionate about alleviating the burden of payday loan clients, they may be able to do more good by diverting resources to educating at-risk populations, showing them how to better organize their finances to signal credit trustworthiness, and explaining the other lending options that may be available.

Third, by lowering rates and reducing the prevalence of legal payday loan establishments, at-risk populations are opened to the dangers of predatory lending in the black markets. Justin puts it well: “At least with a payday lender, default is settled in court. In the black market, it usually involves a crowbar.”