Acton Institute Powerblog

Usury and Market Failure

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When the sign for one of those payday lending stores went up on the corner a block away from my house, I have to say I was less than enthusiastic.

The standard response in a market economy to “market failure” is for a nonprofit to fill the gap in services or meet the need. Today’s NYT reports on efforts in the short-term loan industry to meet that need. As it stands in the market system, “Payday loan stores, which barely existed 15 years ago, now outnumber most fast-food franchises. Typically a customer borrows a few hundred dollars in exchange for a check, postdated to the next payday, made out in the amount of the principal plus a fee of $15 to $22 per $100 borrowed.” 22 dollars every two weeks works out to about 572 percent annual interest.

The troubling part of this is that those who are most likely to need these kinds of loans are the poor, people who are hit the hardest by higher rates of interest. It’s also clear that they are making some very poor fiscal decisions.

Nonprofit groups are in the early stages of setting up programs to help ameliorate the situation. GoodMoney, a joint venture of Goodwill Industries and Prospera Credit Union, charges about half of what for profit lenders charge. That still works out to over 200 percent interest annually, but “Of the $9.90 that GoodMoney charges per $100 borrowed, nearly half goes to writing off bad loans, Mr. Eiden said, and the rest to database service and administrative costs.” In the case of Ms. Truckey, profiled in the NYT piece, because of GoodMoney, “A few dollars from each payment go into a savings account, the first she has had in years.”

Programs like GoodMoney are still in their infancy and it’s clear that charging some level of interest might be a necessary part of encouraging responsibility and promoting independence on the part of the borrower. And market levels of interest approaching 600 percent per annum seem a bit like throwing someone in debtors prison if they can’t pay back a loan: there’s simply no way out of the mounting debt.

Now whether or not the amount that GoodMoney is charging isn’t precisely clear (there are no entries for GoodMoney at either GuideStar or Charity Navigator, and GoodMoney’s website doesn’t seem to disclose a breakdown of the programs expenses), but the enterprise itself is an interesting exercise in meeting the needs coming out of a pretty clear instance of market failure.

Jordan J. Ballor Jordan J. Ballor (Dr. theol., University of Zurich; Ph.D., Calvin Theological Seminary) is a senior research fellow and director of publishing at the Acton Institute for the Study of Religion & Liberty, where he also serves as executive editor the Journal of Markets & Morality. He is author of Get Your Hands Dirty: Essays on Christian Social Thought (and Action) (Wipf & Stock, 2013), Covenant, Causality, and Law: A Study in the Theology of Wolfgang Musculus (Vandenhoeck & Ruprecht, 2012) and Ecumenical Babel: Confusing Economic Ideology and the Church's Social Witness (Christian's Library Press, 2010), as well as editor of numerous works, including Abraham Kuyper Collected Works in Public Theology. Jordan is also associate director of the Junius Institute for Digital Reformation Research at Calvin Theological Seminary. He has authored articles in academic publications such as The Journal of Religion, Scottish Journal of Theology, Reformation & Renaissance Review, and Journal of Scholarly Publishing, and has written popular pieces for newspapers including the Detroit News, Orange County Register, and The Atlanta Journal-Constitution. In 2006, Jordan was profiled in the book, The Relevant Nation: 50 Activists, Artists And Innovators Who Are Changing The World Through Faith. Jordan's scholarly interests include Reformation studies, church-state relations, theological anthropology, social ethics, theology and economics, and research methodology. Jordan is a member of the Christian Reformed Church in North America (CRCNA), and he resides in Jenison, Michigan with his wife and three children.

Comments

  • lmedsker

    I think this is an important point…the Goodwill is offering payday loans at $9.90 per $100 (252% APR). They are doing this either at break even, or even at a loss, but not for profit. For-profit lenders charge $15 per $100 (391% APR).

    So…it seems the break even point for a $100/two-week loan is a fee of $9.90. I guess it doesn’t make the for profit lenders look so bad. Especially because they have to pay taxes, etc. which the Goodwill does not.