Some news stories blamed First Premier for bilking consumers, but this ire is misdirected. A credit company can’t remain in business long if they’re always lending and never being repaid. Whether it’s through higher fees or higher interest rates, the company has to be compensated for the greater risk of lending to those with poor credit histories. And if well-intentioned legislators decided to cap both fees and rates, companies like First Premier would find themselves out of business – and many Americans would find themselves out of any credit at all.
You can see another example of regulation-run-amok in our storied “laboratories of democracy” across the nation. Many state legislators have voted to limit short-term (or “payday”) lenders, either through an outright ban or through caps on the interest rates the lenders can charge. This industry has no shortage of critics, and new regulations have been popping up all over the country.
But, again, legislators have neglected to consider unintended consequences. “Payday” lenders play an important role for millions of people who may not have access to a traditional line of credit. If, for instance, a prohibitive rate cap forces these lenders out of a state, consumers in need of credit seek funds from riskier sources (e.g. loan sharks) or end up defaulting on their financial obligations. It’s no surprise that a study by the Federal Reserve Bank of New York found that states that have banned payday lenders – including Georgia and North Carolina – saw an increase in bounced checks and higher rates of bankruptcy.
The moral of the story isn’t that every government regulation is bad; it just means that the world isn’t as cut-and-dried as our political talking points make it out to be. Corruption on Wall Street and spiraling consumer debt are both serious problems that need real solutions. But if policy decisions are based on emotional arguments instead of economic facts, ham-fisted government interventions are more likely to create new problems than to fix the old ones.