On its face, Initiative 164 might seem like a no-brainer.
The citizen initiative, which is on the ballot this fall, would cap the amount of interest that could be charged for so-called payday loans. Critics of payday lenders say the annual interest rate on some two-week loans can climb as high as 650 percent.
Such exorbitant fees, they say, trap low-income borrowers in a cycle of debt from which they cannot escape. I-164 would cap the rate at 36 percent. And who doesn’t want to help “poor people,” right?
Right — which is why I am inclined to view I-164 as a well-intentioned but misguided crusade.
I don’t think I’ve been classified as poor since I was a broke college student in the 1970s, but it hasn’t been all that many years since I stopped having occasional recourse to payday lenders.
I’m not proud of it, but I’m not exactly ashamed, either. As my fairly wealthy uncle once told me, “I’ve never found an income I couldn’t live beyond.”
Despite my best efforts, it used to be that, from time to time, things would happen — with three children, two cars and a house, all kinds of things were prone to happen — and I’d be a bit short of scratch.
Cash in hand
That’s when I would take myself down to the payday loan joint, post-date a check for something like $225 and walk out five or 10 minutes later with $200 cash in my pocket. That would be enough to keep the wolves from the door a while longer, and, when payday rolled around, the lender would cash my check.
I recall that the documents I signed mentioned some seemingly outrageous annual percentage rate, but what did I care? All I knew was that I was paying $25 for a short-term loan of $200.
That seemed like a pretty good deal at the time, and it still does. It beat the alternative of scrounging a loan off a friend or relative. My improvidence was no secret, but it would have been more embarrassing to ask a friend for an interest-free loan than to pay a lender a few bucks for the same amount of money.
And I knew I liked payday lending a lot more than I liked pawn shops. Decades ago, my electric guitar migrated from a pawn shop storeroom to the display case after I was unable to scrape up enough money to redeem it. Considering how much the guitar was worth and how small the loan was, the annual interest rate, if you expressed it that way, might have topped 2,000 percent.
In addition to my personal experience with payday loans, I have had occasion as a reporter to do a lot of reading and interviewing on the subject.
What I have generally found is that opponents of payday lending rely heavily on anecdotal evidence. In a story about I-164 that we carried last weekend, for instance, a supporter of the initiative said the “business model” of payday lenders “is bringing in people and keeping them as customers.”
Run that by me again?
Why should we believe that? Isn’t it just as plausible that lenders count on a tiny fraction of the people in a given town needing an occasional short-term loan?
When I wrote about payday lending a couple of years ago, critics of the industry said they had “heard” that payday lenders routinely allowed borrowers pay off only the interest while extending the loan.
Trouble is, that is illegal under state law, and the Montana banking commissioner told me that, in her office’s very careful oversight of the industry, it had never found an instance of the practice.
Borrowers can take out loans from multiple vendors, even though they are required to fill out a form saying they have no outstanding loans with other lenders. That’s open to abuse, obviously, but if it’s really a problem the solution is creating an electronic statewide database, not capping the interest rate.
I tend to agree with George McGovern, the very liberal former senator from South Dakota and 1972 presidential candidate who wrote a Wall Street Journal column on the subject a couple of years ago.
McGovern said payday loans seem “reasonable when all your other options, such as bounced checks or skipped credit-card payments, are obviously more expensive and play havoc with your credit rating.”
He wondered why we allow state lotteries, “knowing some people are betting their grocery money.” Good question. Maybe we shouldn’t allow poor people to play the lottery, dump money into keno machines, smoke cigarettes or drink booze.
Because we all know what’s best for “those people,” don’t we?