This was nearly called “In Which I Defend Payday Lenders,” but that isn’t going to be the main thrust of it.
There’s been a lot of talk recently about payday lending and 6000% APRs’ and loan sharking, and who’s fault it is, and what’s to be done about it, and all the rest. Even in free market anarchist and libertarian circles they seem to be seen as a pretty bad thing, and in wider circles Earl may as well be riding a Pale Horse.
So, that 6000%APR. Well, it isn’t really, is it? Now, I’m admitting here that the only payday lender I’ve had business with is Wonga.com, but their 6000%APR isn’t, its a 6000% equivalent APR. They actually charge a fixed sum for the loan. Remember, these are payday loans, not mortgages. They lend you a sum, and charge you a fee for doing so, the representation of the fee as interest on the loan isn’t entirely fair (although presumably if you default then you’re screwed). You borrow a fixed sum and then pay it back (plus fee) in one go, no installments, no compound interest, no “annual.”
So… are they a bad thing? Maybe. Or, perhaps, the circumstances that lead to them existing are a bad thing. In a way.
You see, what Earl and his buddies are, actually are, at the end of the day, is a Market response to a gap. There is a demand for short-term unsecured loans and entrepreneurs have started to satisfy that demand in order to make a profit. Loanees value £100 today over £110 next week, and loaners prefer it the other way around. Both parties gain from the transaction and everybody wins. Loaners compete for business, keeping fees low and service good, and loanees choose who they prefer to deal with.
So where is the bad side? Well, obviously free adults can get themselves in a mess with payday lenders, just as they can with more traditional bank loans, credit cards, opiates, bingo, fixed-odds betting machines and any number of other things that most people are perfectly able to use wisely and some minority can’t handle. That isn’t really a bad side. The bad side is really the circumstances that lead to the niche in the market existing in the first place. That gap isn’t occurring (although the Market’s response to it is, much like the human body’s immune response to a foreign object) it’s caused by distortions.
“Too much month and not enough money” is the marketing slogan, and it is true enough, we’ve all experienced that feeling. Wages, especially at the lower end of the scale do not cover living expenses plus ‘some for a rainy day’ and so when the rainy day comes, you’re basically buggered. Car breaks down, cat gets sick, whatever- living hand to mouth doesn’t leave any room for unpredictable expensive emergencies and that’s where the payday loan comes in.
No, I haven’t joined the Left! This isn’t turning into a diatribe against Greedy Businessmen Screwing The Poor Out Of A Fair Living Wage. That’s a nonsense. To take that argument to its logical conclusion, the infamous Greedy Businessman would soon run out of A) employees and B) customers, as his employees starved to death and his fellow Greedy Businessmen’s employees stopped buying his produce due to being dead of starvation themselves- not generally seen as a state conducive to a bit of shopping.
Labour is a market too, that’s why we refer to it as a ‘labour market,’ and left to themselves businesses and workers would come to an equilibrium whereby wages and prices allowed even the lowest paid enough money to live on (although not luxuriously). Without artificial distortions this is the only way it can happen, as any other methods would be unsustainable. If one business cuts its wages relative others it will find it hard to recruit -or at least to recruit a competent workforce- and if one business raises its prices relative to others then it will find it hard to sell its products.
So what’s all this to do with payday lending? Well, unfortunately we don’t have a free market in labour or prices, what we have is a market filled with distortion piled on distortion. Benefit payments to the so-called ‘working poor’ coupled with high unemployment rates allow businesses to get away with paying lower wages than they otherwise would. Inflation makes prices rise y.o.y. when naturally they would fall, making it A) harder for people to make ends meet and B) easier for businesses to cut wages without workers noticing. Historically high taxes leech ever more of people’s wages. Zombie businesses stalk the land, attracting malinvestment and dependent on government bailout rather than being allowed to fail. Monopolies, duopolies and barriers to entry reduce competition and so on. So, we have a highly distorted market in which a large number of people find themselves worse off each year than the year before, possibly without even realising that they are, in fact, worse off (because their pay cut comes in the form of a below-inflation pay rise) and subsequently (and eventually) find their savings depleted (or in the young not started at all) and cannot dip into them when required. Clearly, people still need money for emergencies and unexpected outlays, and that’s where payday lenders come in. Their existence is almost inevitable, and to do away with them will not solve the problem, it will merely heap another distortion onto the market. The need will still exist, it will just be served in some other fashion.
Maybe even by the loan sharks on the black market that Earl and his buddies get lumped in with.