Competition within this completely legal industry would ensure reasonable interest rates for marginalized clients
Calgary has restricted the number of payday lenders that can operate in a given area. This new bylaw is not based on evidence or sound economic reasoning, but on the subjective ideologies of councillors.
This policy may seem to benefit “marginalized” members of society by limiting their exposure to what has been called “predatory businesses.”
However, this policy may harm the very people – low-income individuals – it was created to protect. By restricting the lenders allowed to operate – thus reducing competition – the policy may in fact maintain high interest rates.
If lenders entered the market as they wish, interest rates on loans would decline through market forces. These market forces are really just lenders competing by lowering interest rates to attract consumers. With access to a variety of lenders, consumers can shop for lenders offering the lowest interest rates.
However, by restricting clusters of lenders, competition is thwarted, market forces are undermined and those who are marginalized are faced with higher interest payments.
But the argument is that clustering payday-loan shops contributes to the woes of borrowers trapped in a cycle of debt. And a CBC report by that 22 per cent of those using these services do so on a monthly basis has reinforced this notion.
However, if 22 per cent of consumers are monthly users, the reverse is also true. That is, the vast majority, or 78 per cent, of these consumers 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 the City of 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 meets 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 who are assumed, in many cases unfairly, incapable of helping themselves.Evidence shows that the majority of payday consumers are in fact rational and can accurately predict how long it will take to repay their loans.
A better 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 it catered to clients who are incapable of repaying loans.
Government’s role is not to enact regulation that restricts competition, but to enforce the law that already protects individuals from exorbitant debt payments. Section 347 of the Criminal Code makes it an offence to enter into an agreement or receive payments exceeding 60 per cent 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.
By Gianfranco Terrazzano
Gianfranco Terrazzano is a graduate student at the University of Calgary’s School of Public Policy. Gianfranco received his Bachelor of Arts in Economics from the University of Calgary.