The 2007 Oregon legislature capped interest rates on payday loans, effectively putting the lenders out of business. What happens now to people who relied on those so-called predatory loans?
The Federal Reserve Bank of New York just released a study about two other states that banned such loans in 2004 and 2005. The conclusions confirm how paternalistic laws aimed at helping the poor often do just the opposite.
The report found that households in states where payday loans were banned have bounced more checks, complained more about lenders and debt collectors, and filed for Chapter 7 bankruptcy more often than households in states that still allow payday lending.
This negative correlation—reduced payday credit supply, increased credit problems—contradicts the debt trap critique of payday lending. However, it is consistent with the hypothesis that payday credit is preferable to substitutes, such as the bounced-check “protection” sold by credit unions and banks, or loans from pawnshops.
Cascade Policy Institute warned the legislature about these bad outcomes before the bill passed, but so-called “advocates for the poor” had their economically unenlightened way. It’s not that satisfying to say “we told you so,” but it seems likely that the outcome will be bad in Oregon also.
How sad that in our zeal to “help the poor,” we end up hurting them even more.
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