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Economy 4.0

Sometimes ‘payday’ rhymes with ‘mayday’

David Brancaccio Jan 5, 2011

Mayday, as in the international distress signal. It is from the French “M’Aider!” or “Help Me!” Payday, as in so-called payday loans, where a loan shop around the corner will float money at a high interest rate until the paycheck shows up and the borrower can pay off short term loan.

The payday loan industry believes it is providing a valuable service, but many see payday loans as exploitative. Even the U.S. Department of Defense looked into whether our national security suffers if troops get dangerously distracted if families get too into hock to payday loan companies. This resulted in new rules for the rates and fees a payday loan company can charge servicemen and women. At the time, a senior Pentagon official said “We equate financial readiness with mission readiness.”

With that in mind, consider the dire warning issued by a George Mason University professor of law. Professor Todd Zywicki’s argument, which appeared in a column in the opinion page of the Wall Street Journal this week, suggests that the financial reform law passed last summer will drive people into the hands of payday loan firm. Pawnshops, too.

The idea is, by cracking down on the credit card industry and regulating fees and terms, the Dodd-Frank law could make it extremely tough for people with high credit risk. But, people have to borrow money from somewhere. If their car’s transmission goes, which is one example the professor cites, then they will likely turn to the sharks, is the idea.

What do you think of this argument? I am all ears.

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