Payday Loans Help Many of the Poor
The Wall Street Journal
April 21, 2009
by: Tim Miller
Robert DeYoung is right to note that borrowers benefit when the short-term payday loan option is available and would be left with only more expensive options were Congress to ban it. ("Congress Takes Aim at Payday Loans," op-ed, April 14). But he does buy into some antiloan activists' rhetoric when he describes short-term payday loans as costing an implied annual percentage rate of 391%.
Payday stores typically charge $15 for a $100 two-week loan, a real-life interest rate of 15%. To reach the dramatic rate Mr. DeYoung cites, a borrower would need to "roll over" his loan an astonishing 26 times -- something that is illegal in most states and so uncommon in others that it is an absurd reference point. Using an annual percentage rate for a two-week loan is like citing a yearly rate for a hotel room. Is a hotel somehow "predatory" if a $150-per-night room could cost $54,750 for an entire year? Paying $150-per-night is reasonable, but most of us wouldn't do it year-round.
The real price of a product is how much you pay for it, not an arbitrary figure for how much you could conceivably pay over an extended time period. And short-term payday loans are actually cheaper than similar financial products like overdraft fees, credit-card cash advances, or paying bills late.
Tim Miller
Center for Consumer Freedom
Washington
