Sunday, November 13, 2011

Unjust Charges of Injustice

Charles Colson has a recent Breakpoint titled “Predators at Large.”  At first glance this conjures up pictures of pedophiles or perhaps those who mug helpless old ladies on walkers.  Perhaps that is the effect Colson wanted as he begins a discussion of so-called “payday lenders.”

These lenders make short-term loans at very high interest rates.  Why does anyone use these lenders?  As Colson points out, it is almost always because they are people whose credit history is so bad that no one else will lend to them.

Colson calls this “predatory lending” and says that those who take out such loans have “fallen victim to human greed.”  Colson condemns this whole practice in no uncertain terms, and this has been the attitude of much of Christendom for a long time.  It sounds horrible to talk about 390% APR loans, doesn’t it?

As is too often the case, we have here an example of Christians failing to do proper economic analysis.  Is there greed involved in these kinds of loans?  Most likely.  Sometimes it might be on the part of borrowers who refuse to delay their gratification until they have the cash in hand.  But more often, I am sure it is simply people who fall into hard economic times.

Are these lenders really “predatory”?  Colson gives a tear-jerking example of a lady who borrowed $500 to pay her car insurance and ended up paying much more than that in interest on her loan.  (As an aside, perhaps we should not be content to concede that everyone has some inalienable right to own a car – but that’s another matter.)

Suppose YOU decided to gather all your available cash:  your retirement savings, your bank accounts, and any other funds you could generate.  With these funds you decide to start a small, personal loan business.  When customers come to you with a credit history that indicates there is only a one-in-five probability that they will pay back the principle of their loan and they have no collateral to secure this loan, what kind of interest rate will you have to charge to keep your little company in business?  These aren’t your friends.  These are strangers with a shaky loan-repayment history.

The answer is, unless you are willing to lose your life savings that you have put into your little company, you are going to have to charge rates high enough to cover the likely default rates on the loans you make.  Since these people cannot even get a loan anywhere else, you are doing them a service by making one available to them.  And remember, they come to you and agree to the terms of the loan.

Colson says of these supposed victims that they “didn’t have any other options.”  But that is simply not true.  They had the options of continuing to shop for a better loan, or not borrowing at all.

To his credit, Colson does not call for the government to shut down such lenders.  He instead points to a church in Pittsburg that has set up program that offers $500 loans with thirteen days interest-free.  This program also encourages those who use it to become savers.

That is a wonderful idea, but it is a charity, not a business.  It is an admirable charity at that, but it’s still a charity.  And as Colson admits, “Not that there aren’t risks, but who ever said that fighting against injustice wouldn’t be costly?”  What is implicit here is this:  unless the clientele of this church’s charity program are somehow self-selecting better credit risks, the church will have a significant number of these loans that will never be repaid.

There is nothing wrong with this.  Clearly, this church is aware of that, and is willing to lose some of its money as part of this charitable endeavor.

But your little loan business is not a charity.  You have to make a profit, and that profit has to be in place even after many of your customers fail to repay all or part of the principle of their loans.  Your loan company, contra Colson, is not “unjust.”  It’s just not a charity.  

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