We can’t claim to be Cassandra because some people do believe us some of the time. It’s just that more people should believe us more of the time:
But there are growing concerns over the vacuum of lending that has been left in its wake.
Loan sharks and other unregulated lenders are stepping in to replace the likes of Amigo. Buy now, pay later lenders, which offer an alternative form of lending, have also filled the space.
A survey of debt advisers by the Joseph Rowntree Foundation found that 16pc of lower income households were borrowing from unlicensed moneylenders last year, equivalent to around 1.9m households.
The Centre for Social Justice (CSJ) also estimates as many as 1m people in England are in debt to loan sharks, up from 300,000 in 2010.
While the end of high-cost credit is good for customers, what’s replaced it could be much worse.
The reason for this? As we said would happen:
Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researchers treat a 36 percent cap as an outright ban.
The interest rate was capped. It has acted as an outright ban. Therefore people who wish to borrow small sums for short terms are turning to illegal lenders. The one’s where it’s the kiddies’ kneecaps that are the security.
We suggest that this is not a societal advance. As, in fact, we said back then.
Now, we are willing to accept that things could be better. Generally and specifically better. That’s rather the point of believing in free markets, that people can think up better ways and then have the freedom to do them. But we do want to insist upon a very important part of this process.
The bad thing, whatever it is, that should be replaced by the better. Do not ban the bad thing and hope the better then turns up. Instead, invent, develop the new thing and then watch, in astonishment, as it replaces the worse.
Create first then outcompete, do not ban then hope.
Because that second is how the babbie’s kneecaps end up on the line.