Interest Rate Caps
Reuters reports Peru Passes Law Allowing Central Bank to Cap Interest Rates on Bank Loans.
Peru’s Congress approved on Wednesday a law that will allow policymakers to cap interest rates on loans granted by banks, a controversial measure that has been deeply critiqued by the Andean nation’s government and financial institutions.
The law empowers the country’s central bank to set maximum and minimum interest rates every six months in order to regulate the loan market, a measure lawmakers said is necessary to protect Peruvians from abusive lending practices.
Loophole
The loophole in the bill is that it “allows” rather than “requires” the Central Bank to cap rates on bank loans.
Regardless, this is a horrible idea.
If the Central Bank or government set rates that are too low, loans will dry up.
This is similar to Venezuela setting the price of gasoline at 10 cents a gallon. That’s the official price but the supply at that price is zero.
The government set the price of gasoline but it cannot secure the supply.
The result is a huge black market.
What About the Fed?
The Fed does not set bank loan rates directly, but it does influence them.
For example, mortgages loan rates are generally tied to interest rates on 10-year US Treasuries that the Fed does manipulate.
Interest Rate Floors and Subsidies
Unlike the setup in Venezuela, the Fed can indeed provide all the supply of dollars it wants. And as long as borrowers use the money for speculation, housing, and other items that do not show up in official inflation stats, the Fed can get away with it.
Low interest rates helped fuel the stock market bubble and other speculative activities. The result is three major bubbles in 20 years, with allegedly low inflation.
Few see the current bubble only because it has not popped yet.
These are all good reasons to end the Fed and let the market set rates.
Mish
Capital Punishment for Bankers Would Solve Many Problems
China Sentences Former Bank Chief to Death in Rare Move:
There is too much debt alreasy so balking at the solution is a bad idea. Negative interest rates are deflationary and banning positive interest rates will eliminate bad debt.
Cap bank profits on loans and a bunch of problems will be solved. We live in a banking structure that is a cartel.
Capping lending rates is necessary. We have regulated capitalism, not lassez faire capitalism. Loans should dry up at usurious levels.
What’s worse is paying interest on bank deposits. That’s money that the banks already own.
Meanwhile, in another world…
PARIS (Reuters) – The father of British Prime Minister Boris Johnson said on Thursday he was in the process of applying for a French passport to maintain his ties with the European Union after Brexit.
Stanley Johnson, a former member of the European Parliament who voted Remain in Britain’s 2016 referendum, told RTL radio he wanted to become a French citizen because of strong family links to France.
Since he has strong family links to France he applies for French citizenship to facilitate living within the country. It’s a common thing with bi-national families and means nothing in itself.
So, what exactly is your point ? Even before the fckn EU, people in Europe could always move to other countries, to work, to set up a business, or just to live if they could afford it, it is still the same these days, NOTHING has changed, I d even say it is more complicated nowadays than before the EU with its pedantic rules….
Heath insurance. He is retired and depends on the British National Health Service. Before Brexit if he got sick in France he would still be covered because Britain was in the EU. Now with Britain out the French Health Service will no longer cover him. Lots of retired Brits who live here here are doing the same thing because it is practical. If you were really from Brussels you would know that but you aren’t so you don’t.
That’s exactly what I was getting at, if you have the financial means to live in any country you will get a residence permit, ….and what about your health insurance in France, yank ?
It’s the French Secu plus a mutuelle . How do you do it in Russia?
In Russia, the morgue is guaranteed….
The doc said ‘to the morgue- to the morgue it is!’
“But what is wrong with me?!”
‘The autopsy will show!’
Interesting question ,why don t you tell me, you seem to know everything ….and when I come to think of it, Sochi looks like a nice place to me or Crimea since it became russian territory again; with money you can settle everywhere….like your ‘fellow countryman’ , Gerard Depardieu, he became a russian citizen at one point did he not? …..and the russian vaccine must be more reliable than the -70°c Phizer shit or the too expensive Moderna stuff and the inefficient Astra Zeneca mishmash….
S novym schastem!
Gerard is not my countryman. I am American and not a French citizen even though I live here. I have never been to Sochi but I hear it’s nice. I have been many times to St. Petersburg and Moscow. I prefer Moscow because it’s looks and feels like a city that works. It’s energetic. St. Pete is beautiful but it too much like all the other museum-cities one can find in Europe.
Pfizer
The limit of 90 days in any 180-day period in France for non-EU citizens is long-established and not related to Brexit, although its application to Britons is a consequence of it.
“…For example, mortgages loan rates are generally tied to interest rates on 10-year US Treasuries that the Fed does manipulate…”
The Fed is stepping on the yield curve’s tail. While the head (30 Yr UST) and body (other bonds, notes and bills) can move, that change is constrained.
Also, the Fed is buying $40B of GSE debt/mo (Fannie Mae, Freddie Mac, Ginnie Mae, etc.)
With the $1.4T continuing Congressional budget resolution, plus the $0.9T stimulus, the Fed will have to increase its UST purchases in order to keep interest rates down where they are. This creates more monetary inflation, and given the misallocation to businesses that should have failed/faltered, GDP will only be moderately, positively affected. This should be positive for anti-inflationary investments such as gold.
Tip-toe through the tulips….
You are seeing the utility of a central from purely economic reasons when the value of a central bank is much more than that. First of all central banks came into being basically to manage the repayment of debts taken on during costly wars. By that they were able to instill confidence in bondholders as well as rationalizing the methods of taxation. The result was that a country with a good central bank in war could muster much more money to pursue war than one without a good central bank. The classic example is thanks to the Bank of England Great Britain with one third the wealth and population could defeat France in the Seven Years War. Other countries took note and set up their own central banks if they could. One of them was France who attempted to clone the Bank of England, with a French flavor of course, but failed. France failed because of the complicated interlocking of interest groups prevented any reform. They all agreed that something must be done but when a reform Finance minister tried to do it these interest groups would gang together and get him fired. By the way these interest groups were not just the nobles or clergy. It encompassed all layers of society. Essentially all groups had rock-solid reasons why their taxes shouldn’t rise and those of other groups should. The Estates-General was called to cut through this financial Gordian Knot and we know what happened after.
Fast forward to today and the central banks have a new problem they didn’t have before. Government financing depends above all on taxation and borrowing is a much smaller part. In the last twenty years or so the very wealth corporations and individual (the very very wealthy) have found ways to avoid taxes to an extent never seen before. On top of it a great share of taxable assets have been switched into foundations many of which are just means of keeping a part of their money tax-free while still being able to control it totally. The result is the tax burden more and more on fewer shoulders. Let’s be realistic and recognize that meaningful tax reform will not take place for the same reasons it couldn’t take place in pre-revolutionary France. There are too many interlocking interest groups and can block any reform they don’t like and get rid of anyone who doesn’t play ball. Central Bank governors are very smart and what they see is the tax base collapsing. When it happens to a state like Illinois people like Mish can just pack up and leave. There is a safety value. If it happens to a whole country people can no longer do that. What it comes down to is that the Fed is no longer the lender of last resort. That is past. The Fed sees its role now is to be the tax payer of last resort. That is what they are doing now and that changes everything.
…We are not at war now, are we ? The world doesn’ t need CBs interfering where they shouldn t , interrupting healthy economic cycles just to keep the debt built house of cards, or Ponzi scheme if you like, from falling apart! The longer this situation lasts, the worse the final demise will be ! Makes me wonder, France is not exactly a tax friendly nation, is it ? They really cant afford to with 60% of the active population getting paid directly or indirectly by la Patrie,…very sustainable …as long as the card house doesn t collapse… with special thanks to the ECB, of course..
Excellent! Very good explanation. Perhaps the best I’ve ever read.
I remember reading about JP Morgan bailing out the US government….Is the Fed now more or less trying to do the same thing? To keep the bonds safe for the Bond Kings who run the world?
The Fed is the bond king now. I look at it that way. That’s why rates are negative. I mean which bond king in their right mind would loan money at negative rates?
“Fast forward to today and the central banks have a new problem they didn’t have before. Government financing depends above all on taxation and borrowing is a much smaller part.”
Really? The Fed for one is issuing dollars (borrowing) like never before and the Government is/will be issuing huge volumes of treasuries, and they’re doing this because they can’t raise enough in taxation, not today anyway. It seems to me they’ll keep doing this for as long as they can get away with it.
In normal times taxation and the like provides around 92.5% of the budget the shortfall is the budget deficit which is made up by borrowing in the financial markets. This time around the FED sells debt and immediately buys it back itself. The ECB does the same as well as the Bank of Japan. In some investment banks government bond desks are closing down because they have nothing to do because the seller and buyer are the central banks. I have no idea how long it will last. I expect that asset inflation will continue but goods inflation will remain subdued simply for the reason that there ample opportunities for companies to still offshore and keep wages low.
Bank of Japan now also buys stocks via ETFs to prop up its stock market. Crazy but JCP is now top 10% owner of many of the top Nikkei 100 companies.
Many might not be away that the Swiss Central Bank can print money and has been a big buyer of U.S. stocks. They buy companies with good dividends. So you prints some money (because they have a stable currency everyone wants), and then you buy companies that pay good dividends. Great gig. Print money out of thin air and the mop of dividends and USD from companies in the U.S.
It also helps them keep the Swiss Franc from skyrocketing. Print francs then sell them for dollars then buy US stocks with those dollars.
Switzerland is a small country of just 8 million people, but they make an outsized impact on economics and finance and money.
Because Switzerland is considered a safe haven and a well-run country, many people would like to hold large amounts of their assets in the Swiss franc. This makes the Swiss franc intolerably strong for Swiss businesses and citizens.
So the Swiss National Bank (SNB) has to print a great deal of money and use nonconventional means to hold down the value of their currency. Their overnight repo rate is -0.75%.
That’s right, they charge you a little less than 1% a year just for the pleasure of letting your cash sit in a Swiss bank deposit.
Switzerland Is Buying US Stocks on an Enormous Scale
And the SNB is buying massive quantities of dollars and euros, paid for by printing hundreds of billions in Swiss francs.
The SNB owns about $80 billion in U.S. stocks today (June, 2017) and a guesstimated $20 billion or so in European stocks (this guess comes from my friend Grant Williams, so I will go with it).
They have bought roughly $17 billion worth of U.S. stocks so far this year. And they have no formula; they are just trying to manage their currency.
Think about this for a moment: They have about $10,000 in U.S. stocks on their books for every man, woman, and child in Switzerland, not to mention who knows how much in other assorted assets, all in the effort to keep a lid on what is still one of the most expensive currencies in the world.
What Happens When There Is a Bear Market?
Who bears the losses?
Print just more money to make up the difference on the balance sheet? Do we even care what the Swiss National Bank balance sheet looks like? More importantly, do they really care?
To paraphrase Petyr Baelish (Littlefinger). Money is just marks on a piece of paper.
“This time around the FED sells debt and immediately buys it back itself.”
True, increasing the money supply when they issue dollars to buy the debt. Even cash in circulation has risen enormously.
I think you’re failing to see the real perspective of those mythical Rothschild types…..
The ones who own the Fed can charge the plebes usurious interest on banks cards issued by their banks…and they have many other ways of making a return.
The value of the bonds now is in keeping the currencies they’re denominated in from crashing and taking down the whole house of cards, and wiping out a lot of intergenerational wealth.
These forums are of interest to me precisely because I like to sample the attitudes of people who are at least interested in economics and financial markets…..but the knowledge level is really low.
Most participants are retired and super risk averse….and they read Zero Hedge and listen to the Peter Schiffs of the world…and they think the system is going to fall apart next week. They hoard gold and wait for Weimar 2.0.
Plus, there is a historical perspective parroted in many, if not most, books about investing….that avoiding all debt is a key to building wealth. Which was once true, but not anymore, imho. Not since ZIRP.
The younger crowd is the opposite…..just looking to pick some hot stock and get a 20X…..or find somebody who can call the tops for them…when it’s bottoms they should be looking for…..When the bottoms do come, those people will be the last to be buying anything.
A few smart, successful investors make comments on sites like this…and I try to listen for the pearls they occasionally drop. I appreciate your insights.
Like the guy who calls himself Realist here, I am interested in reality….not somebody talking his book. I always look for mentorship where I can find it. I consider Mish a mentor, although I don’t always agree with him.
Of the current crop of people who write about investing, I like Robert Kiyosaki and Daniel Amerman the best…..I have met them both…..Robert is a close friend of my wife’s brother….and Dan is just a fantastic teacher…..a wonky guy who has nothing to sell other than knowledge…I credit those two guys with helping me achieve modest success.
In general there are two camps on forums like this…..people who have few assets and who blame the system for that…and would love to see a “Great Reset”..so they buy into all that rot….and there are a few people who understand that the way to become better off is to emulate the people for whom the present system is working.
I consider myself one of those…..although I freely admit the system is deeply flawed and unstable. I try to look for ways to hedge, as best I can…..a good day job helps…which is why I’m in no hurry to retire. I’m probably better at what I do now than I ever have been….and it’s easier….maybe the pasta of least resistance….lol.
It’s the insurance companies that hold the bonds and the persons who control these companies like Warren Buffet are the bond kings. Insurance used to make their money on investments and not on insurance products but now they can’t make money on their investments but they have the advantage of raising their insurance rates to customers and make money that way (Warren is very cunning) . They don’t like not making money on bonds but they get by very nicely still. For leveraged entities bonds are just for collateral and for hedging and the person running the hedge book cares less about the actual interest rate on the bonds but cares much more on how the bond prices move and how that affects their hedging strategy.
I retired early because I had enough to and I wasn’t having fun at it anymore. I know how to use debt but I don’t want to be bothered with it anymore. I am net assets and cash and thanks to the Fed and the ECB both are building steadily. I am 68 years old and there have been very few times I remember where there wasn’t “the end of civilization” meme being peddled about one thing or the other and yet we are still here.
As someone in the industry at least on the periphery i can tell you once you get to sub-sub-sub-prime credit where rates are 18% , 20% or 25% etc the market is totally inefficient , way under-regulated and predatory. Those taking loans are usually quite desperate and non-repayment is not only probable but anticipated. This is why states have usury laws and why companies involved in pay day lending schemes have gotten super-sophisticated in evading the laws and sourcing funds in ways that make legal recourse extremely difficult.
Isn’t it true that we had usury laws in the US to control predatory lending……and the banking lobby was able to get rid of them….so that banks could get in on the action?…….
It wasn’t like that before Michael Phillips invented the modern bank card (Mastercard)….I see it as a sort of creeping opportunism that arose in the wake of that new technology.
Mike is still alive….I think he’s 86 or 87 now. I consider him one of my mentors.
So, Mish is saying the Fed capping rates at 0.00% – 0.025% has made lending thus debt scarce?
What planet does Mish live on? Mish is advocating super deluxe ultra massive govt and pirvate debt because he is advocating a policy that promotes and directly creates it.
HOW VERY VERY INTERESTING, THAT!!!!
How to be an ECONOMIC DEMOGOGUE:
Write an article entitled:
“How to Make Loans Scarce in Two Words: Cap Rates”
Because, if we can rates, people won’t have the honor of being ripped off at 24% credit card debt – something the Fed promotes. They won’t have the honor or pay day loans and having their money stolen from them
Two words: don’t borrow
Exactly. Let the borrower(and lender) beware.
Let people prey on the vulnerable in other words?
Not a new idea.
Neither a borrower nor a lender be,
For loan oft loses both itself and friend,
And borrowing dulls the edge of husbandry.
Yeah, heed the words of wise Polonius.
He also said “Though this be madness, yet there is method in ’t.”
Reminds me of the Fed.
You want to borrow when inflation is on the horizon. German Businessman who saw high inflation coming (or had inside knowledge), borrowed a lot pre hyperinflation and than they paid back the loans at 10 cents to the mark a year or two later. Maybe all the big corporations who are borrowing money knows something. Now during deflation, having debt is terrible.
There were winners and losers from the 1923 hyperinflation. The worst affected were the Mittelstand (middle class) who relied on investments, savings or incomes from pensions or rents. In 1921, a family with 100,000 marks in savings would have been considered wealthy – but within two years, this would not be enough for a cup of coffee.
Germans with large debts also benefited from hyperinflation, since they could be easily repaid. Some clever businessmen borrowed early in the inflationary cycle to buy property, then repaid the loan weeks or months later for next to nothing.
in general i agree but there comes a point where that’s no longer the case. we’re talking about usury rates. the pay-day lending space is an example. the rates offered have little to do with economics but prey on borrowers not understanding their options , being desperate and being preyed upon.
Sechel-Tell this to the mafia and other assorted loan sharks. If people are stupid enough to do business with pay day lenders let them suffer the consequences. Sounds like a reasonable plan to me.
“These are all good reasons to end the Fed and let the market set rates.”
The more things should change, the more they stay the same. Not one bubble, but three. Not one Covid stimulus check, but two. Not one crisis to not let go to waste, but many. It is like Groundhog Day. Human nature never changes.
No gold standard anywhere, has not been broken. Human nature demands that it be broken. Even looting the Aztecs and Inca’s of their golden treasures couldn’t keep the Kings of Europe from debasing their money due to profligate debt.
Klaus Schwab is pushing for a Great (debt) Reset, which would be a dramatic change in how the world operates. Communism 3.0, as Martin Armstrong calls it. Is everyone ready to own nothing and be happy, according to Scwab’s world Economic Forum grand plan?
We still need the Fed. It was established for a reason. When the Federal Reserve gets in trouble is when they exceed their charter, and their intelligence level.
My guess is that this is a pre-emptive move.
They may see an Argentina-style crisis coming upon them. Current rates in Argentina 38%, over 60% last year.
…Peru’s economy collapsed at a record pace in the second quarter as the pandemic shuttered businesses and put almost half the country’s urban population out of work. Gross domestic product plunged 30.2% from a year earlier, the deepest slump of any major economy, the country’s statistics agency said Thursday….
Default on bonds?
Cap interest rates and loans dry up. Raise interest rates and buyers dry up. Somewhere in the middle is a market that would control that anyway. So the Peruvian Congress wants to take a political stance on what is “fair”, even though there is no such thing as fair. There’s just markets and that’s it.
Yes. I agree there is a bubble. I was a huge bear in 2007 because the easy money financial engineering was creating a housing bubble that was going to pop. I did not realize it would spread so much.
This time feels different. This feels like the verge of inflation. Ray Dalio said he could see PE go to 50. That is crazy talk as he is bearish long term as he see a bubble.
Your Peru scenario is a good one. I think Governments are looking for the CBs to keep interest rates low. Trump kept asking the FED to follow the ECB and go NIRP.
There is so much debt that has been taken on by Governments and Corporations and consumers. I wonder how they can raise interest rates anytime soon? Rising interest rates anywhere above 4% would be very bad.
The world needs inflation to deflate all this debt.
What happens next….I have no idea.
“Few see the current bubble only because it hasn’t popped yet.”
I don’t think it’s quite that simple….it’s easy to see the problems….but right now the Fed is NOT about to go away….it’s the only game in town….and you have to play it. You have to try to make strategies that use Fed policy to your own benefit…as best you can.
So if you have access to cheap credit that you can lock in for a generation at historically low rates…why not use it? Buy some solid tangible asset that has cash flow and a chance of keeping up with inflation. Is there anything like that? Yes, there is.
Quite likely most of us will be pushing up daisies and the Fed will still be the Fed….I sure don’t expect to outlive it.
LOL You are right. Whenever another financial crisis shows up, the FED pulls out another financial engineering trick. Truly amazing. They can turn a recession around in less than a year.
I was in a Mexican restaurant the other day that opened in the 1970s and they had the original menu up. A taco was a .25 and a burrito 50 cents. A meal was$1.8.
Now the taco is$3.5 and the Burrito about $4.5. A meal is $8.
Also, sales tax was about 3.5% and now it is 10.25% in this state. Since most people spend 90% of their take home pay, they do not realize they have 8% less discretionary income than than they did 40 years ago because of taxes. Add in the high gasoline tax, the cell phone taxes, etc.
They have less discretionary income because of prices as well.
Actually many of us see the bubble. When it does pop let those that are part of the ‘bubble’ suffer the consequences, including Wall Street. If I was running things when the last real estate bubble started to crumble in 2008 I wouldn’t have bailed anybody out. That includes Wall Street. Let them go broke just like everyone else. Lots of pain but hopefully lessons will be learned and stricter lending standards will be imposed. Let them eat cake.
I agree….but we know that will not happen. There are a few people that make a billion dollars a year. You are either founded a very successful business like Tesla or you are a hedge fund CEO. I think the top 10 to 20 hedge fund owners/CEOs earned income is over a billion a year. That is only type of job you can make a billion a year income. Business owners usually see their wealth increase via stock appreciation and then sell the stock.
Warren Buffet said his two main Hedge Fund guys make about 500 million a year. He said they would do over a Billion on their own.
So what I am trying to say is those are the people who make big money contributions to politics to get thus they will be bailed out.
A good example of communism at work.
Where do interest rates fit into communism?
You shouldn’t use words you don’t know the meaning of.
That is what happens in planned economies such as communist countries usually have. Economic decisions are made by decree. The Republic of Peru is a unitary state and a presidential representative democratic republic with a multi-party system. The current government was established by the 1993 Constitution of Peru. The government is composed of three branches, being executive, judicial, and legislative branches. From Wikopedia. But I see they have a government much like ours.
The definition of communism is only a couple lines long… would have been easier to read it and shut up than to write all that bs and make an even bigger fool of yourself.
His meaning is clear enough. If they cap interest rates, people will have to give up their property, and will be forced to move to communal property and produce for the state. I don’t follow the logic, but I’m sure that’s what he said…
In general I agree, yet it still bothers me to see the payday lenders out there. Are people really better off when they have access to loans at 1200% or higher interest? Loan sharking is a business that has been around for thousands of years, but that doesn’t necessarily make it a good thing.
If people understood the game, I wouldn’t have a problem with it, but if people understood the game, nobody would play.
There are caps and then there is usury. S/B a reasonable cap of perhaps 10% over the fed funds rate
Yes, they are much much better off.
Here’s how: I’m a landlord with 72 tenants. EVery month I have a tenant who is facing eviction due to having unexpected expenses. Here in NC there’s a 126.00 eviction fee plus we charge a 10.00 late fee. If rent isn’t paid by the 20th of the month, I file eviction on the tenant. Nearly all landlords in NC will do that. As long as the tenant pays the rent, the late fee AND the new 126 eviction fee that I was charged to file on her and she does so before the court date, she can still live there.
This happens all the time to tenants who have a bit of bad luck (car breaks down, medical bills etc).
IF the tenant’s paycheck is just a few days after I file, they can avoid the extra 136 fees by going to a paycheck loan place, get a high interest loan and pay it off shortly thereafter
Overall, they gain because they:
Payday lending places CAN be over used by low income people, but they absolutely can be a massive blessing to people facing eviction and will actually save them money, which I see every month.
The only problem with that argument is that the costs to the payday lender make them worse off in the long run, and the next month they have the same problem or worse. I’ve never known anyone who started using a payday lender who was able to get out on their own. I have loaned money to a couple of people to pay off their payday loan, and I offer no interest, no fee, no questions asked payroll advances to my employees precisely so that if they ever have an unexpected expense, they can deal with it without having to get suckered into the hopeless rathole of payday lending.
Personally I’d like to see a cap on the rate that payday lenders can charge. 200% a year should allow them a profit, but we wouldn’t see 2 on every corner like we have now.
I see people use them all the time for very short periods and it helps them.
Yes, they should be allowed to charge whatever they want. No one is forcing people to go to them. Those payday lenders absorb huge losses from non-payers and must, of necessity, charge high interest rates.
If you limit the interest rates, then expect most of them to disappear, if not all of them.
Then I’ll be evicting about 1/3rd of my resident each year who would normally be able to stay and recover financially from their problems. Once they lose their housing it gets very very expensive for them as they lose their job (from not showering) they lose their credit (from not paying me rent) and will never rent again.
Capping rates on payday lenders is literally the worst thing ever for poor people. Well intentioned, but horrible for them.
Payday lenders exist for a reason…they are needed. We may not like the services they offer and yes, they trap people sometimes, but they are helpful to many.
“Then I’ll be evicting about 1/3rd of my resident each year”
You could negotiate a deferred or term payment; maybe earn some tenant loyalty and good will at the same time.
Or ya, just send in the hounds.
What you propose sounds great….except it’s illegal nearly everywhere.
I cannot legally treat loyal tenants and create goodwill.
That’s discrimination. What if the loyal tenant who cannot pay rent for a month is white but I evict another black tenant who hasn’t lived there long enough to qualify as a loyal tenant? That’s right….I get taken to the courts where I will lose, and lose badly. I may even lose my property.
No, one must always follow policy, especially in the low income rental world which is subsidized. It’s literally illegal to do what you proposed, as nice as it sounds.
That’s where high interest lenders come into play. Yes, they have a function and can be used wisely by those who need them, even if many end trapped.
If payday lenders didn’t exist at all, there are other alternatives, including EBay and pawn shops. Heck, there’s even the “retro” ideas like “saving for a rainy day” or borrowing from friends. Payday lenders are just a modern form of slavery.
O, I agree, people need to save for a rainy day. That would be best.
However, they don’t. Payday lenders sometimes are actually the cheapest option.
If you think Ebay and a pawn shop are better options for low income people to raise cash then you haven’t seen the rates that pawn shops charge. They charge 10x what payday lenders charge….if you compare the loss to the person in need equally.
Pawn shops usually offer 1/2-2/3rd the value of what is being traded. Compared to a payday lender who lends for a short time, that loss to the person borrowing makes the payday lender look positively generous.
Example: I trade in a gold ring worth 1000 and get 650 for it from a pawn shop. I lose 350 in the process in one day. Annualized that loss is over a million percent (loss of 1/3 of value every day).
Payday lenders charge over 500%, usually. One must remember though that that interest rate includes fees…and payday loans are repaid quickly.
Given the choice between a payday lender and a pawn shop, a person would do far far better using the payday lender than the pawn shop, by a factor of 10.