I Can't Believe I Have to Say This: Predatory Loans Are Bad
Despite industry claims to the contrary, we're better off without usury.
Welcome to the third and latest instalment in my “I can’t believe I have to say this” series. Previously, I covered such wide-ranging topics as why Doug Ford is to blame for the Greenbelt scandal (he is) and why former speaker of the House of Commons Anthony Rota should resign (he did). Today, I’m reminding readers that no matter what the payday loan industry says, predatory personal loans are bad. Very bad.
I promise I won’t cite the Bible in this post or go on a long rant about usury. Let’s just get it clear from the top that extracting high rates of interest from desperate people is bad. We’ve known it’s bad for millennia. It doesn’t take a treatise to explain why it’s bad.
In short, high interest rates are abusive. Charging marginalized, desperate people interest at 40 percent, 50 percent, 60 percent, or even, in some cases, over 600 percent is absolutely bonkers. As Megan Leonhardt wrote for CNBC in 2021, in Texas, “[t]he typical APR [annual percentage rate] for a loan, 664%,” which is “more than 40 times the average credit card interest rate of 16.12%.”
Borrowers who pay high interest rates quickly get trapped in a cycle of debt and desperation, many of whom end up there through no fault of their own. The pandemic, for instance, drove a lot of people into the arms of predatory lenders. The practice is wretched and parasitic, to say the least. And yet lenders pretend they’re some sort of beneficent public service. They’re nice guys! They’re helping! Hell, they’re basically Jesus Christ! (Jesus, we know, was a huge fan of greed.)
In 2023, the Canadian federal government moved to limit how much interest lenders could charge. Last year, the budget specified the maximum rate would be 35 percent at a date to be determined by the government. Advocates want the cap to be even lower, at 30 percent, which would be more than reasonable. Now, the loan industry is claiming the move will cut vulnerable people off from much needed cash, while the usual suspects are warning it could cost jobs and economy activity, too.
Those who oppose Ottawa’s lowering of the criminal rate of interest are also warning that lower maximum interest rates — still high, mind you, but lower — will put lenders out of business and drive borrowers to back alleys and shady corners. But as Elizabeth Mulholland of Prosper Canada told iPolitics “there’s not much difference between a 60 per cent interest loan and a loan shark.” Indeed.
Don’t buy the loan industry’s nonsense. We do have a problem here, since folks who need cash will do what they must find it one way or another, but the solution isn’t letting loan outlets gouge people who are struggling to make it through the day. As others have noted, there are structural solutions to the problem, particularly those which reduce the need for loans in the first place such as food banks and socialized housing and shelters. Big changes to how we pay, shelter, and feed people are essential. But there’s another complementary role for the state here: postal banking.
In 2022, I made the case for postal banking in a piece for Jacobin. In the piece, I called payday loans a private tax for state failure — an oppressive mechanism that keeps those who are down and out, well, down and out. I argued that postal banking is one way to address this predatory behaviour in the nearer-term as we struggle to make it so payday loans are a thing of past, rendered unnecessary by a more just and secure economic system and social welfare state.
Under postal banking, the state would act as a lender. Designed properly, there would be no incentive for it to rip people off (nor means, since it would be prohibited). A postal bank could manage and absorb risk better than private lenders and return profits to state programs.
Many countries already offer postal banking, including France, Italy, and New Zealand. Canada did, too, once. There’s also push for this model or something similar in the United States, including in New Mexico where the Alliance for Local Economic Prosperity is making the case for a public bank for the state.
I’m going to leave it there for now. I’ll return to this topic at some point, I’m sure. But I wanted to remind people that despite what lender lobbyists and consultants say, there is a better way to serve desperate borrowers than predatory private loans — and that’s a public bank with a mandate to serve the public, not to exploit them.
The Pay Day Loan Industry should be put out of business entirely. End of story. Many marginalized people end up in the grips of the Pay Day Loan Industry because they cannot open bank accounts and therefore cannot cash their cheques. As a starter legislation should be passed that compels the regular banking industry to permit everyone regardless of economic means to open both a chequing and Savings account. Furthermore the regular banking industry should be prevented from charging the run of the mill service fees from anyone whose income is below the poverty line. Pay Day loan companies exist in part because the regular banking industry discriminates against the marginalized, and as a result places them in an even more precarious situation.
I am old enough to remember having a post office saving account. My family lived far from any bank but the Post Office let me save and withdraw easily. I probably still have my little account book somewhere. Its a good idea David…I wonder if anyone will pick it up?