Comments on: Payday Loan Industry in the News

By: Josh Smith

Josh Smith — Mon, 23 Nov 2009 17:20:30 +0000

Suppose someone needs a short term loan and is considered a credit risk. They get a loan from either a payday loan store or a loanshark. There are certain factors which prevent them from paying back which they can control, and some factors which they cannot. If we assume that the interest rate is sufficiently remunerative to cover the possibility of a default beyond their control then the question remains “how do the lenders best incentivize the borrowers to work hard to manage the things they *can* control which enable them to pay back?” High interest rates and threats of violence are both expensive from the point of view of borrowers. The point, I think, is that violence is abhorrent and we would prefer if there were a healthy market of competing options for people who find themselves in the situation described in the first sentence of this comment.

By: vroman

vroman — Mon, 23 Nov 2009 00:15:39 +0000

I wasn’t saying black market version is better, just explaining why white market short-term lenders have to charge higher premiums: they are facing increased moral hazard, bc they DONT have violence option.

By: Eric D. Dixon

Eric D. Dixon — Thu, 19 Nov 2009 22:49:30 +0000

Just like if you install a metal spike pointing at your heart on your car’s steering column, you’ll be a safer driver. But the increased specific probability of death in the event of a crash isn’t necessarily a good tradeoff for the decreased general probability that a crash will occur in the first place.

By: vroman

vroman — Thu, 19 Nov 2009 22:14:02 +0000

There is a lot of moral hazard in the crowbarless short-term loan industry. If you know they aren’t going to break your jaw if you dont pay, the incentive to default is higher.

By: Mike S.

Mike S. — Thu, 19 Nov 2009 21:07:41 +0000

A lot of the people who today take out payday loans would have gone to a pawn shop in the past. What kind of effective interest does a pawn shop charge? I bet it’s not 1% above prime.

By: Mike

Mike — Thu, 19 Nov 2009 13:36:41 +0000

As long as the industry can show that they are operating above the board – no hidden fees, step up charges, etc…. then they should be free to operate as they choose. If their pricing is too high then eventually someone will step in and take their business away.