Credit Part II: An Economist's Take on Ohio Issue 5 To Cap Pay Day Loan Interest

Sorry about the lack of blog posts, I’m learning how to advise students this week. So back to the credit market. This November Ohioans will be voting on a cap of interest payments for loans. As I noted in a blog post over a year (one of my first at Towson), interest rates at payday loan locations can approach 400% per year, the cap on the ballot is 28% a yea.

The Toledo Blade argues that voters should vote against the cap because “Opponents would have voters believe that 6,000 jobs will be lost if H.B. 545 goes into effect because payday lenders can't keep their doors open charging "only" 28 percent interest. They say the issues at stake are financial freedom, privacy, and not limiting lending options.”

As I noted in my previous pay day loan post, there are more payday loan operations than McDonalds in Ohio. In my home town of Delaware, OH its 4 McDs compared to 6 check cash/ pay day loan locations. Economic theory would dedicate that if one of them could still make money by charging 50% interest they would and could likely garner all the business by advertising lower prices.

Since there are many payday loan companies and anyone can start one, it is likely few loans will get made at a 28% interest rate.

I’m reasonably sure these payday loan jobs will be lost, people will no longer be able to get loans. From a pure economic theory stand point, we must believe that either people would be better off having the option of a payday loan or that people are not very good at making their own decisions so eliminating payday loan operations would be a net improvement.

I no longer live in Ohio, but I spent the first 18 years of my life there. I’m not sure how I would vote, because I see both beliefs.

Next post (hopefully tomorrow), I will compare payday loans with microcredit in developing countries. Why is that small loans in developing countries have lower interest rates (100% per year) and why are these loans more likely to be repaid.

Pay Day

Surprising statistic of the day. There are more payday loan franchises in Ohio, my home state, than McDonalds, Wendy’s, Burger King combined. According to this report on pay day loans in Ohio these places charge on average $15 per $100 loan for a two week period. For those of you without a calculator that is an average interest rate of around 400% a year! I’m not an expert on payday loan places, but like the fast food industry it seems that there are several different companies. I assume if one wanted to start their own payday loan place they could if they had enough money, or could borrow enough. In this type of situation economists would predict that if profits could be made at a lower interest rate someone would come in and charge $10 per $100 per two-week period. So I think what this interest rate suggests is there is an extremely high level of default for payday loans.

Clearly the tougher question is how would/could regulation improve the payday loan industry and consumers.

In other news I got my first pay check from Towson today. Thank you Towson!