Latest Attack on Short-term Loans from Ocasio-Cortez and Sanders

The latest attack on short-term loans comes from New York Rep. Alexandria Ocasio-Cortez and Vermont Senator Bernie Sanders, and the measure is called the Loan Shark Prevention Act.

It is a catchy name, but it doesn’t capture what short-term loans are.

Short-term loans, colloquially known as payday loans, are high interest loans made available to people in a pinch who might not have good credit or other resources.

It is the higher interest rates that allows the lender to take a chance on risky borrowers.

It's a trade off: you don't have good credit, but I'll take a risk on you for a certain interest rate.

Nobody should ever take a long, high- or low-interest, without thinking it through.

For some borrowers, the short-term, high-interest loan is what is available.

The Sanders/Ocasio-Cortez measure would place a 15 percent cap on consumer loans, which be devastating to the short-term loan business.

This would leave a lot of people, who don’t have good credit and are in a tight spot, in the lurch.

Indeed, as my colleague Patrice Lee Onwuka pointed out these loans can be a logical choice for some people who know their options and decide to do this.

The big question is whether consumers of short-term loans need Washington (or state legislators) to protect them from decisions that they heretofore made themselves. Is it possible that this can be a good resource for some borrowers, though nobody should make short-term loans a way of life.

In a previous blog, I wrote about Robert Sherrill, a successful businessman, who grew up in public housing and did a stint in prison. In his book, The Journey Back to Now, Sherrill, then not an ideal candidate for a bank loan, recounts how he took out a payday loan to turn around his life.

Sherrill wrote in an article in the Examiner:

When I got out of prison and wanted to turn my life around, a payday loan allowed me to start my commercial cleaning business, Imperial Cleaning Systems, Inc.

As many small business owners will tell you, starting a company isn’t easy — there never seems to be enough money. I needed a simple $1,000 loan to get myself up and running; but I quickly found out that banks and credit unions have regulations and rules that typically hinder those with a criminal background and a turbulent financial history.

It’s true, I had made mistakes in my past, but this meant I found myself without any options to legitimately pick up the pieces and move forward with my life after my release.

I had two choices: Return to my old ways and earn money on the streets, or try for a personal loan to keep my business afloat. Advance Financial, a local financial service center in Nashville, took a chance on me and loaned me the resources I needed to get started.

These loans saved my business, and they no doubt saved my life. Today, Imperial Cleaning Systems employs more than 20 people in Nashville.

Since Washington started its witch hunt against payday lenders, I’ve also spent time learning a lot more about the industry. I’ve discovered I’m certainly not alone in understanding and benefiting from these small-dollar loans. In fact, one recent study found a majority (63 percent) of customers who used payday loans believe the companies provided them with good information about the fees and risks.
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Let’s be clear: If the government takes away this legal, regulated option for credit, many customers will still need to find a way to pay for living expenses and unexpected emergencies like having to repair a heater this winter. Without these loans, many will get that money in a more dangerous way. Others will find themselves even deeper in debt.