No one likes to pay interest – but most of us need to borrow money at some point in our lives. Interest is the price of borrowing money – no different, when you think about it, than paying rent to borrow a car for a period of time. Few of us expect rental car companies to just let us borrow a car for free. Most of us accept that it’s reasonable for the rental company to charge us a fee.
So why is it that lenders – who do the same thing when they let us borrow money – are the objects of so much scorn?
Payday lenders in particular.
Somehow, they’re bad guys for facilitating short-term loans – for giving people access to ready cash when they need it – because they charge for the service.
Oh, the humanity!
Sure, they charge more than a conventional bank. But this is because the loans are short-term. A 3.9 percent loan on a 15-day note would be as ridiculous as a 22 percent rate on a 30-year mortgage.
Also unlike a conventional bank loan, payday loans don’t take weeks (or months) to process – and endless stacks of paperwork, either.
The way it usually works is one presents a pay stub or car title as proof of pending income or collateral against the loan – and the person seeking the loan agrees to pay back the principal plus the fee (i.e., interest) for the use of the money.
Some see this as “unfair” – and want to either outlaw payday/title loans entirely or drastically restrict their availability. Some being the Consumer Financial Protection Bureau (CFPB), a government agency no one elected – much less endowed with power to act in loco parentis.
That is, to parent us – as if we were children.
CFPB has proposed rules that would require payday/title lenders to “take steps” to “make sure” that people who take out loans can pay them back.
“Today we are taking an important step toward ending the debt traps that plague millions of consumers across the country,” said CFPB Director Richard Cordray.
When a person obtains a payday loan, it is issued on the basis of … his pay. It is a statement of income – exactly like the income tax forms one presents when applying for a conventional (long-term) loan at a bank. The lender – in both cases – must take it on good faith that the person seeking the loan is not over-spending his income, is responsibly managing his money. But they – the lenders – have done their due diligence in terms of ascertaining that the customer is in fact earning money and therefore has the means to pay the loan back.
But is it not the obligation – morally speaking – of the person taking out the loan to not bite off more than he can chew? To exercise good judgment, be judicious with his money?
The person who takes out the loan – any loan – may prove to be irresponsible. Unable to pay the loan back, or not in a timely manner – and so accrue more debt as a result of interest.
But how is this the lender’s fault?
And those title loans? How do they differ – in principle – from buying a vehicle on credit? If you stop making the payments, the lender (whom you owe) takes back the vehicle. Which – properly speaking – is not your vehicle. Not until you’ve paid it off. And if you use your paid-off vehicle as collateral for a loan and fail to pay back the loan, should the lender just eat the loss and give you clear title to the vehicle?
If this is the new principle to be enshrined in the law, pawn shops and layaway retailers (such as Rent-a-Center) had better start packing up.
And how about equity lines of credit? You have a paid-for home but need some cash for an improvement or whatever. You take a loan out, using the home’s value as collateral. Few reasonable people see injustice if the home is eventually foreclosed on if the borrower is unable or unwilling to repay the loan.
A loan he freely chose to take out.
Just as people choose to take put short-term payday and title loans. No guns have been held to anyone’s head. It’s a business transaction, freely entered into by – allegedly – free (and grown up adult) people.
CFPB assumes grown adults are imbecile children, first of all. Who can’t understand a contract – and therefore, should not be held to the terms agreed.
Second- and based on this premise – it seeks to assume the role of Wise Parent, making sure the imbecile children do what CFPB considers to be the “right” thing. It does this under the arrogant presumption that its bureaucrats and regulators know best. That they – and only they – can be trusted to act as responsible adults.
And will tell you what’s best.
Keep in mind, the CFPB is not a consumer advisory service like Consumer Reports magazine. That would be one thing – and by no means a bad thing.
But CFPB isn’t about advising. It is about forcing. Do this – or else. It is government. Which – as Washington warned us – is not reason or persuasion but force.
Like fire, it is dangerous when not under control.
And the CFPB is out of control. Unelected – unwanted. There is no popular outcry for its existence, no mandate for its mission. Just the empire-building arrogance and condescension of the CFPB itself.