Payday Lending

Loan Sharks May Owe Some State Lawmakers a Big 'Thanks'


Public Domain

Years ago, one of my cousins was struggling through a semi-pro boxing match. In disgust, my grandfather remarked, in a line much repeated over the years, "too bad he can't pistol-whip 'em like he does the deadbeats." That particular cousin, before trying an unsuccessful transition to chin music, collected for a loanshark—hence the quip. Research suggests that most loans from loansharks ended more amicably than popular culture suggests—which makes sense considering that they did repeat business—but still, borrowing from underground lenders has always come with certain risks. Those risks may be encountered more frequently as lawmakers in three state move to restrict "payday loans," and potentially drive borrowers to illicit sources.

In Alabama, lawmakers move to "make sure people don't take out more than $500 in loans at one time."

In Utah, legislators passed a measure that "will give borrowers time to pay off loans without interest or sanction after 10 weeks of high-interest payments; ensure that any lawsuits against borrowers are filed in courts near their homes; and require data disclosure that may end years of debate about whether the industry is predatory."

And in Louisiana, the political class wants to "cap the fees that can be charged by the storefront lenders at an interest rate of no greater than 36 percent annually."

If I was shopping for a loan, I'd find neither the Utah nor Louisians measures objectionable, though Alabama's restriction on loan amounts would likely cramp my style, depending on what I wanted to borrow the money. From a lender's perspective, though, the restrictions threaten to limit returns on investment, which restricts the amount of risk they take on. Higher-risk borrowers mean more defaults, and that has to be offset somehow. Either you charge more, or you exclude more people from loans.

Maybe some people shouldn't borrow; I won't argue the point. But borrow they will. And if they can't borrow legally, even if on lousy terms, they'll borrow illegally, also on lousy terms. But enforcement in the illegal market isn't done by nastygrams, harassing phone calls, and garnished wages—it can also come with the likes of my cousin.

Let me note that some pundits insist that choking off the legal availability of this particular service somehow defies the laws of supply and demand and doesn't breed an illegal market. Robert Mayer, in an oft-cited law review article conflates high-interest loans in the early, unregulated market with illegal loans in the regulated market in a way that seems deliberately obtuse (he gets away with this because the term "loan shark" was originally little more than an epithet for a lender borrowers resented, and then evolved). He also seems ignorant of how illegal markets develop, and that it may take time to evolve the infrastructure for them. It also may prove difficult to actually track and measure them. Go read his piece and decide for yourself.

I find those pundits unconvincing, though. Supply and demand are universals. It seems unlikely that thwarting demand in the legal market won't drive it to the illegal market, and I have yet to be persuaded otherwise.

High-interest rate loans suck. But if there's demand for them, somebody will offer supply. Better that the debts are collected over the phone or by nastygram than by somebody like my cousin.

NEXT: Insider Trading is Very Damaging to Markets and a Terrible Crime, Unless Your Job with the SEC Forces You to Do It

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  1. “Years ago, one of my cousins was struggling through a semi-pro boxing match, In disgust, my grandfather remarked, in a line much repeated over the years, “too bad he can’t pistol-whip ’em like he does the deadbeats.””

    I didn’t first read the byline and after that sentence, I didn’t need to.

    1. I says to myself, “I wonder if this is JD…”

    2. C’mon, you didn’t wonder for just a moment if it could be Jersey boy Nick?

      1. My mind went right to Nick. That’d be just like a Jets fan.

    3. Ooh, check out his photo:

  2. I think I could handle this racket. There’s always pathetic townies hanging around these bars.

  3. I find payday lenders, rent to own, and pawnshops fascinating.

    How many industries are there where the businesses *and* customers are actively trying to rip each other off?

    Not just a passive “I got a good deal”, but a “we deliver the rent-to-own items so we know there is a place and they aren’t being immediately sold” and “I just rented this and immediately sold it”

    1. “How many industries are there where the businesses *and* customers are actively trying to rip each other off?”

      Gov’t lottos and casinos come to mind. Horse races?

  4. Doesn’t matter if these bills drive short term loaning underground. Passing a bill is “doing something,” and that’s all that counts.

    1. It’s not like anyone can foresee these unanticipated side effects or anything.

  5. Your family sounds fun, JD. Exactly the kind of people my family wouldn’t let near them with a 50-foot pole. Let me guess, you’re Sicilian?

    1. No way you could ever forgive me. Not with this Sicilian thing that’s been going on for 2,000 years.


      2. You broke my heart, Warty. YOU BROKE MY HEART.

        Want to go for a ride in the fishing rowboat?

        1. If history has taught us anything Epi, it’s that you can kill anybody. Even Warty.

          1. While it would be entirely satisfactory to have Warty sleep with the fishes, he’s far too useful as an enforcer. People pay you back after Warty rapes their entire family. They pay you back fast.

      3. Also, I found this on Yelp.

        I’d eat there based on the name alone.

        1. “I love their thick crust and I love there thin crust.”
          In 116 reviews

          How the fuck do you get it right the first time and then screw it up the second?

          1. It’s that fucking good.

          2. Worse, how do you spell it one way and then, 6 words later, spell it differently. The first ‘there’ isn’t even out of sight yet.

    2. It was an ABORTION!

    3. More Neapolitan. But the “interesting” side of the family is, shockingly, heavily Sicilian.

      1. Hah. I was mostly joking (I’m Calabrese so that’s only about a half step above Sicilian), but it’s funny because it’s true.

        1. You’re not Calabrese, you’re a disgusting greasy wop.

        2. Epi you’re Calabrese?


          ‘Ndregheta eats Cosa Nostra for brunch just before siesta.

      2. So you’re the ice cream guys! that’s SO awesome!

        1. Marge! We need some more vanilla, chocolate and strawberry ice cream!”

  6. “too bad he can’t pistol-whip ’em like he does the deadbeats.”

    Holy shit. That’s an amazing line.

    1. Maybe he was throwing the fight after he “found” some money in his locker.

      1. Trowin’ da fight??!


    2. Moonbeam is pardoning some lifers in CA; believe me, there’s politics involved, but…
      Anyhow, one on the comments in the Chron was:
      ‘OK, but please don’t let my cousin out!’
      There’s a whole story in that sentence, and I don’t want to know what it is.

  7. Way to be a stereotype, Tuccille Family.

    1. Way to be an awesome stereotype, Too Chilly Fam!

      1. J.D. Tuccille will never be editor-in-chief of Reason magazine. I don’t care how many dago guinea wop greaseball goombahs come out of the woodwork!

    2. Meh.

      Many of us ‘know people.’

  8. “Maybe some people shouldn’t borrow”

    Maybe the government shouldn’t decide that.

  9. These people understand that the term of the loan is normally two weeks, and that annualizing the interest rate is a horseshit measurement, right?

    1. Whether or not they understand, they simply don’t care.

    2. I wouldn’t bet my next paycheck on that…

    3. The same way that those fighting ‘sex slave traffincking’ care that *their* stats are correct.

      Or the anti-cigarette campaigners care about the quality of data on second hand smoke.

  10. HA! Stossel’s got teh big scissors out.

    1. If he doesn’t end an episode behind his giant fort made of reams of printed regulations, consider it a wash. Last year three of his stage crew died when the prop boxes avalanched. True story.

      1. As I heard it, they were only orphans.

        1. If an orphan is crushed under an avalanche of props, does it make a sound?

          1. And more importantly, would anyone care?

            1. Yes, some of those props are expensive and hard to replace.

  11. While you were out;

    Two large gentlemen, answering to the names Guido and Nunzio, visited. When told you were away, they muttered something about “kneecaps” and said they would call again.

  12. I wonder how many percent of payday loan transactions are done for the purpose of paying government fines.

  13. I work for a payday loan company that offers a “new” version of the traditional payday loan. There are actually 2 companies that I’m aware of that have adopted this new model, Landmark Cash and Fair Loan Financial. I don’t want to say which one I work for but I know the business model is the same for both.

    The interest rate of a traditional payday loan can be be 5x the original loan amount by the time the borrower pays it off. With the company I work for interest rates usually end up being about 20% of the loan which is far better. Maybe this will stick, maybe it won’t but it’s better for the consumer in my opinion. People are always going to need money and without payday lenders these people would be forced to use loan shark type lenders.

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