Why we shouldn’t demonise short-term lenders
People who aspire to be a hero – yet have few redeeming features – understand the need to manufacture a villain. They know there can be no Superman without Lex Luthor, no Roadrunner without Wile E Coyote, and no Batman without The Joker.
The short-term lending industry, which emerged in the late 1990s when government regulation forced banks out of the sector, is the latest villain of choice.
A report on the ABC’s Four Corners earlier this year did a number on short-term lenders by lining up activists to perpetuate stereotypes about people who take out these loans as helpless, stupid or addicted, if not all three, and lenders as evil-doers preying on them.
What the program didn’t tell us is that you would be hard pressed to find any industry that is more regulated. In fact, people are so well protected that many struggle to navigate the red tape.
What the program told us is that many loans come with unconscionably high interest rates. In fact, typical short-term loans are about $400, and fees and charges are capped at 20 per cent of capital advances and 4 per cent per month. The most anyone can be charged for defaulting on a loan is 100 per cent. There is no spiral of debt.
Certainly, this is a lot of money for some people. However, at various times most of us borrow much larger sums in proportion to our incomes and repay amounts well in excess of 100 per cent of the principal over a longer period. It is blatant paternalism to prevent low-income people from borrowing money when they need it, on the grounds that they don’t know what they are doing.
For those worried there are other ways for people to be trapped in debt by payday lenders, such fears are misplaced. Anything you can think of, and many things you have never thought about, are covered in over 10,000 pages of regulations. That’s more than applies to long-term loans and is the equivalent of about nine copies of War and Peace.
About one in 20 of these loans turn into bad debts, considerably less than the percentage of bad and doubtful debts held by big banks. But for the vast majority of people who use them, short-term loans are a useful way to get out of a tight squeeze without imposing on friends or relatives, or resorting to the temptations of high-interest credit cards.
THE REAL EVIL: GOING WITHOUT
But consideration should also be given to what happens to people who don’t get short-term loans.
No doubt some end up going without necessities. Others are inevitably driven to desperate measures outside the law. And of course some would come to private arrangements that unravel and end in disputes and potential violence. That part of the story was never likely to be told by Four Corners.
Short-term lenders are now facing a fight, as the banks once did, to avoid being regulated out of existence. When Bill Shorten was financial services minister, he attempted to introduce a fee cap of 10 per cent of the principal advanced, and 2 per cent per month. This might look reasonable at first glance, but the profit of about $40 on a typical two-month loan simply won’t cover the cost of filling out a paper trail the length of the Hume Highway.
Excess regulation also has a perverse effect. By making it harder for legitimate businesses to enter the market, they provide an advantage to dodgy operators. For the illegal loan sharks, more regulations are better because they hobble competitors, while the loan sharks ignore the rules altogether.
Short-term lenders exist to make a profit, just like banks. They are not our friends but they aren’t our enemies either. Profit is what motivates all businesses. You might want to spend all your money on red frogs at the corner store but it would be foolish to think this means your grocer is evil.
The ultimate goal of many of the government-funded activists quoted on Four Corners is not only to signal how virtuous they are, but to create some kind of government bank which bails out people who make bad choices. If you think organisations that exist to make a profit are scary, wait until you find yourself on the hook for a government scheme that exists to pay off other people’s debts.