April 9, 2012

Short-Term Lending Regulations Can Do More Harm Than Good

Last week, Cole County Circuit Judge Dan Green cast out a ballot initiative’s wording for a proposal that would cap interest rates at 36 percent. Apparently the wording on the petition sheets could deceive voters. This ruling will almost certainly prevent the initiative from being placed on the November ballot.

The issue is not going away forever. The supporters are continuing their effort to cap interest rates. I admire the desire to protect borrowers from abusive lending, but there is a better way than capping interest rates.

Interest rate caps at this rate will not only prevent high interest rates; they will eliminate payday loan shops in the state. Consequently, payday borrowers will probably not be able to acquire credit.  A better way to help borrowers is to make cheaper credit available. Do something similar to what this group is doing, and donate money to banks to offset losses from high-risk, short-term loans — thereby bringing down the interest rate.

For an excellent, succinct analysis of payday loan shops and regulations, click here. For more detailed commentary on the topic, see here and here.

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