The City of Calgary has passed a bylaw restricting the number of payday-loan lenders that can operate in a given area. This policy is not based on objective evidence or sound economic reasoning, but on the subjective ideologies of individual councillors.
At first glance, this policy may seem to benefit the so-called “marginalized” members of society by limiting their exposure to “predatory businesses.”
However, this policy may harm the very people – low-income individuals – that it was created to protect. By restricting the amount of lenders allowed to operate – i.e., reducing competition – this policy may in fact prop up and maintain high interest rates.
If lenders were able to enter the market as they see fit, interest rates on loans would decline through market forces. These market forces are really just lenders competing with one another, lowering their interest rates in order to attract consumers. With access to a variety of lenders, consumers are able to shop around for businesses offering the lowest interest rates.
However, with the restriction on cluster formation, competition is thwarted, market forces are undermined, and those that are “marginalized” are faced with higher interest payments.
But clustering payday-loan shops contributes to the woes of borrowers trapped in a cycle of debt. Doesn’t it? The statistic reported by CBC News that 22 percent of those using these services do so on a monthly basis has reinforced this notion.
However, if 22 percent of consumers are monthly users, the reverse is also true. That is, the vast majority, or 78 percent, of consumers using these services do not rely on payday-loans on a regular basis. This statistic alone cannot prove that most payday-loan consumers do not rely on these services. However, it certainly questions the validity of the argument that payday services perpetuate poverty among borrowers.
But doesn’t Calgary have a responsibility to protect borrowers from making bad decisions and to prevent payday-loan lenders from preying on the less fortunate?
This is problematic. Disparaging a completely legal industry that is meeting a market demand as inherently immoral will ultimately reduce individual freedoms. Instead of allowing individuals to make decisions enhancing their own welfare, the City of Calgary has intervened to protect the individuals assumed, in many cases unfairly, incapable of helping themselves. Evidence shows that the majority of payday consumers are in fact rational and are able to accurately predict how long it will take to repay their loans.
In the case of payday-loans services, a better policy option would be to allow competition among lenders while enforcing the Criminal Code.
Allow competition to drive down interest rates. Allow consumers to make their own choices that maximize their own welfare. And allow lenders to maximize their returns by providing loans to those who are capable of repayment and turn down others who are incapable. After all, no payday-loan lender would stay in business if they sell to individuals who are incapable of repaying loans.
Government’s role in this situation is not to enact regulation that restricts competition, but to enforce the current law that is in place protecting individuals from exorbitant debt payments. Section 347 of the Criminal Code makes it an offense to enter into an agreement or receive payments exceeding 60 percent of the total value of the credit advanced. Enforcing this rule, rather than interfering with individual choices, should be prioritized.
Poverty is a real policy issue. However, restricting an individual’s ability to acquire small loans at a competitive interest rate does not seem like an effective way of addressing it.
Gianfranco Terrazzano is a graduate student at the University of Calgary’s School of Public Policy and a current Institute for Liberal Studies Fellow at the Canadian Constitution Foundation. Gianfranco received his Bachelor of Arts in Economics from the University of Calgary.
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