Activists don’t want to protect consumers or preserve a way for lower-income Americans to access short-term, low-dollar loans. They ultimately seek to put the industry out of business.

Tweet

The strange and pervasive new war on the working class has another target:  short-term lenders, which provide a lifeline for lower-income Americans facing temporary shortfalls.  

This occurs at an acutely inopportune time, with a new Brandeis University study finding over one-third of working families unable to meet basic needs:  

Thirty-five percent of families who work full time year-round do not earn enough to cover basic needs like housing, food and child care, according to a new study released in RSF:  The Russell Sage Foundation Journal of the Social Sciences.  

The study, authored by researchers at Brandeis University’s diversitydatakids.org program at the Institute for Child, Youth and Family Policy, examines how earnings from parents’ full-time work stack up against the resources necessary to meet a “basic family needs budget,” or the amount needed to afford basic needs like housing, food, medical care, transportation, child care and minimal household expenses.  Researchers find that the situation is especially dire for low-income families with children.  More than three-quarters (77%) of those who work full-time do not earn enough to cover their basic needs.  

For such working families, confronted by persistent inflation and a nationwide economic contraction, short-term lenders offer critical funding to get them through unexpected emergencies.  

For many of them, traditional bank loans remain out of reach and credit cards aren’t always a viable option.  While Americans with higher incomes and credit scores can often borrow from traditional lenders or tap into savings, not everyone can access those avenues.  Accordingly, if deprived of small-dollar and short-term lending options, many struggling Americans would instead possess no alternative but to bounce checks, miss payments on financial obligations like rent or seek out dangerous loan sharks.  

Proving once again that you can’t judge a book by its cover or an organization by its name, however, the Better Business Bureau (BBB) seeks to “rein in the power” of short-term lenders.  

As part of its deceptive effort, the BBB acknowledges that borrowers repay short-term loans “within a week or two,” but nevertheless proceeds to insist on calculating interest on an annual percentage rate (APR).  Using that false annualized metric, the BBB resorts to scare tactics by calculating interest rates soaring into triple-digits.  The BBB then advocates an array of potentially disastrous policy changes, including expansion of federal regulatory power and an arbitrary interest rate of 36% measured by APR.  

Here's why using APR is a dishonest tactic.  Because an APR is calculated on the basis of a full year, loans with much more abbreviated repayment periods result in exponentially distorted pictures of actual interest to be repaid.   After all, these loans are by definition short-term loans.  

To illustrate, imagine that you borrow $100 and agree to repay that $100 principal plus a $10 interest fee within two weeks at your next paycheck.  Simple enough.  But if you irrationally calculate that $10 on an annualized basis, that’s suddenly (and inaccurately) a 261% interest rate.  Accordingly, if the BBB gets its way and an artificial 36% APR rate were to be imposed, lenders would be limited to $1.38 over two weeks on a $100 loan.  That’s simply unsustainable for short-term lenders who wish to remain in business.  

But of course, that’s the point.  Activists don’t want to protect consumers or preserve a way for lower-income Americans to access short-term, low-dollar loans.  They ultimately seek to put the industry out of business.  

They might as well label their idea the “Leave No Loan Shark Behind Act.”  

All of this creates a bizarre and indefensible societal paradox.  On the one hand, college graduates earning up to $125,000 annually – putting them in the top 10% of American income earners – may soon have their loans forgiven even though they’ll typically earn $1 million more over the course of their careers than Americans without college degrees.  Meanwhile, this avenue for lower-income Americans to access legal, short-term loans may slowly be suffocated entirely.  Square that intellectual and ethical circle.  

Elsewhere, federal and state governments shower the wealthy with electric vehicle subsidies while aiming to eliminate gasoline-powered cars entirely.  And in California, Governor Gavin Newsom and the state legislature just passed a law creating a statewide bureaucracy to dictate wages and working conditions for fast-food franchise restaurants that will obviously impact lower-income residents disproportionately.  

With inflation soaring and a deep economic recession looming, all of this is occurring at the worst possible time.  For many Americans, short-term lenders offer the only safe, legal, reliable source of temporary low-dollar lending to meet unexpected emergencies.  Working-class Americans are already suffering enough right now without sanctimonious activists targeting them further.