Sunday, September 15, 2013

Payday loans (and other high interest lending) as repugnant transactions

In poor communities there is a profitable business of making very high interest rate loans to employed but "unbanked" workers. High interest rates (between lenders and apparently willing borrowers) have been repugnant transactions for a long time, and payday loans are no exception: here's a story from Pro Publica on the controversy in Missouri. The Payday Playbook: How High Cost Lenders Fight to Stay Legal

29 comments:

Graham Peterson said...

I lived for seven years above a currency exchange in Humbolt Park in Chicago -- a business which gets criticized similarly as payday loan shops (no worries: there was a payday loan shop a block away). But in between the payday loan shop and the currency exchange was a full service bank.

If the claim is that currency exchanges and payday loan shops charge usurious rates and fees, why wouldn't rational consumers substitute to the bank once it opened? I thought it would be interesting to just stand outside with a clip board and ask people.

Milton Recht said...

Many people dislike banks. Many people also see taking out a short term loan (or using credit cards) to buy groceries and to pay living expenses such as rent and utilities as repugnant even if the lender is a bank charging a much lower annualized interest rate than a payday lender.

Is a transaction (payday loans) a repugnant transaction when the solution (short term consumer bank loans) is also a repugnant transaction?

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