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May 16, 2019 | Impossible-To-Repay loans are Not Legitimate Financial Services

Danielle Park

Portfolio Manager and President of Venable Park Investment Counsel (www.venablepark.com) Ms Park is a financial analyst, attorney, finance author and regular guest on North American media. She is also the author of the best-selling myth-busting book "Juggling Dynamite: An insider's wisdom on money management, markets and wealth that lasts," and a popular daily financial blog: www.jugglingdynamite.com

As I explained in The indefensible predatory business of payday loans, criminal interest rate caps stood for many years in both Canada and the United States at 60%. The financial lobby had governments carve out workarounds in the last decade, and impossible-to-repay rates–often compounding to several hundred present annualized–have enabled credit enslavement to go mainstream since.

Capping lending rates will not eliminate loan sharks but it will help de-legitimize the activity and take it off of main streets where many are now masquerading as respectable financial service firms.  As I observed in the past:

We will not be able to rebuild financial strength and stability in society and the crucial middle class until we stop letting financial predators strip-mine vulnerable people and leave social wreckage for taxpayers to underwrite.

Two so called ‘far-left’ US democrats have now proposed a bill aimed at capping lending rates.  This issue should not fall along partisan lines though, it’s about ethics and what kind of businesses a civil society wishes to propagate and subsidize with finite public resources.  Former savings and loan crisis prosecutor Bill Black offers further perspective on the topic in the following clip.

They call it Loan Shark Prevention, which would allow post offices to act as banks for poor working people, but credit companies claim it will hurt the poor. Here is a direct video link.

The classic lender-lobby argument against re-capping loan rates is articulated here. To wit (with some parenthetical comments from me):

“While annualized interest rates on payday loans look very high, one must keep in mind that the term of these loans is short, typically two weeks”.

[DP: Initial 2 week periods typically roll over into consecutive terms with additional fees that quickly snowball into impossible to pay sums.  We might as well bring back debtor’s prisons that imprison people indefinitely.  At least physical incarceration was visible to the public, as debtors were fed and housed on the taxpayer’s tab at the bidding of lenders who had made bad loans].

“Furthermore, payday loans are better than illegal alternatives that can result in higher rates or even criminal behavior. Yet, a 15% cap would make it impossible for most of these credit-constrained Americans to get credit through payday loans or other means”.

[DP:  Giving people loans they cannot reasonably repay is not helping them.]

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May 16th, 2019

Posted In: Juggling Dynamite

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