I have for a number of years on these pages deplored the activities of the payday loan companies. I have always held that payday loans should be illegal, if the interest rate charged exceeds a certain amount. I would propose no more than 100% per annum, as an APR as the maximum rate of interest, which would prevent payday loan companies from charging 3000% or 4000% per annum.
The businesses that operate payday loans have proved that they are quite incapable of self regulation; they must be regulated by the state for the protection of the people.
As far as I can see there are two arguments that the payday loan companies and those that are prepared to tolerate their activities prey in aid of permitting payday loan companies to charge whatever they like.
The first argument is that if the state sets limits then people who need to borrow small sums of money would be driven into the unwelcoming arms of illegal criminal lenders. That argument does not hold water. It seems to be based upon the inconvenience of enforcing the law, rather than a moral principle which must be the foundation of all law. It could be used for allowing people to drive cars at 50 miles per hour in cities, or for permitting a large amount of pollution.
The second argument is that people find payday loans convenient and that 85% of those who take up a payday loan repay it before its term. The fact that 85% of payday loans are repaid before their term indicates that the risks to the payday lenders simply do not justify the massive rates that they charge; in normal lending the rate of interest charged depends upon the risk to the lender.
The office of Fair Trading has referred the pay day loan business to the Competition Commission. It says it is difficult to compare different pay day loan offerings and the industry build in barriers to prevent switching to cheaper lenders as pay day loans are rolled over. They also have concerns about irresponsible lending.
Payday loan companies play a numbers game. It pays for them to lend irresponsibly because the vast majority of their target customers are honest, trustworthy and in desperate need of money. If the industry lends to as many people as possible at the highest rates the fact that some of their customers may not afford to repay the loan is outweighed by the fact that the vast majority of their customers will eventually repay the loan and enough of the interest to enable the payday loan companies to make a mouth wateringly large profit.
The rich are getting richer and the poor are getting poorer; everyone agrees that this is not good for our society. In logic the rich can only get richer at the expense of the poor, and the poor can only get richer at the expense of the rich, although there are exceptions when some of the rich may get poorer through stupidity or ill fortune and some of the poor may get richer through talent or good fortune.
What is clear is that with payday loans the poor get much poor and the rich who lend the poor the money get much richer. That cannot be right.