Consumer loan cap will hurt poor and benefit loan sharks
We certainly can understand the California Legislature’s well-intentioned attempt to protect low-income consumers from what some lawmakers view as predatory lending practices. Short-term loans, which provide fast and easy high-interest consumer loans for those with a desperate need for cash, can ensnare people in a cycle of debt.
But limiting this choice doesn’t fix the unpleasant circumstances that cause people to seek out such loans. Assembly Bill 539, which recently passed the Assembly and has been sent to the state Senate, will leave potential borrowers in a tougher bind. It would cap annual interest rates at 36 percent for loans between $2,500 and $10,000 and impose some other regulations.
The bill’s supporters describe such rules as a moral imperative. There’s nothing moral, however, about shutting down one of the last options for those who can’t afford a medical treatment or a new transmission for their broken-down car. Supporters also say that low-income people deserve better options. That’s a nice sentiment, but few such options currently exist.
Interest rates can be so high for an obvious reason: Borrowers usually don’t own property or have collateral that banks use to secure the debt. People who lack credit are not the most secure lending risks. If lenders cannot charge enough to compensate for financial reality, they will stop offering these loans.
Not everyone has good credit or can go to a major bank and secure a loan at prime interest rates. Bank loans take time to underwrite and sometimes consumers need money right away. Not everyone has family who can help them out of a pickle. Yes, borrowing money at eye-popping interest rates is a bad idea. It’s probably better, however, than eviction or having no way to get to work.
“Without these alternative financial service providers, those folks would have nowhere else to go,” said Assemblywoman Sydney Kamlager-Dove, D-Los Angeles, as quoted by Associated Press. Lawmakers may be trying to do the right thing here, but they don’t seem to realize the alternative to pricey consumer loans might be a loan shark.