WJBC Forum: Treating symptoms, not causes

Illinois People's Action and Occupy BloNo hold a candlelight vigil outside Bloomington City Hall on Monday night in support of payday lending restrictions. (Photo by Ryan Denham/WJBC)

The Bloomington and Normal city councils may or may not be able to pass an ordinance limiting the interest Payday Loans can charge.

But if they can, it doesn’t mean they should. Doing so would address a symptom and leave the problem untreated.  Let’s assume Payday loans doesn’t exist and that the folks who want it out of town have the money to operate Benevolent Loans, a charitable group which will loan Payday’s former clients money for necessary reasons.

Benevolent’s supply of money is limited, so it must get back the money it loans so that it will be available to loan to other needy persons.

Benevolent knows that its loan applicants couldn’t get a loan from a bank. This means that they have poor credit scores and probably little or nonexistent collateral to secure repayment of the loan. This in turn means that to get the loaned money back, Benevolent may have to hire an attorney (who will charge 1/3 of the money recovered), advance over $200 in court costs, and wait months for the legal process to play out.

Any judgment it gets against the former client may or may not be collectible and, even if it is, will be collected only over many months, during all of which, new clients will be unable to be served. Since Benevolent is not a bank, it has no other operations it can use to cover its ordinary business expenses and absorb any losses and delays.

The only way it has to keep itself in operation is to calculate what its costs and losses from bad loans will be and charge enough interest on its loans to cover them. The lower its volume of business, the greater the impact one defaulted loan will have on its operation. Expressed as a percentage, the interest Benevolent might have to charge would probably rival Payday’s.

Some of Payday’s clients may be borrowing for unwise reasons, say to finance a habit of some sort. Some may have a legitimate reason: the car they need to get to work broke down and the repair cost may approach the value of the car.

If Payday doesn’t exist, there are two alternatives: no repair, or Guido, who doesn’t answer to any government agencies. I don’t have the answer to that problem, but neither do the city councils.

This is David Stanczak on WJBC’s Forum.

Listen to the Forum below:

Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.

David Stanczak, a Forum commentator since 1995, came to Bloomington in 1971. He served as the City of Bloomington’s first full-time legal counsel for over 18 years, before entering private practice. He is currently employed by the Snyder Companies and continues to reside in Bloomington with his family.

The opinions expressed within WJBC’s Forum are solely those of the Forum’s author, and are not necessarily those of WJBC or Townsquare Media.