Payday Lending Restrictions Would Punish Responsible Lenders and Borrowers and Violate Rights

Beverly Brown Ruggia is the Financial Justice Program Director for New Jersey Citizen Action, and her New Jersey Star-Ledger op-ed pans a financial bill in the legislature. In Legislators must stop this bill. It perpetuates a cycle of poverty in New Jersey, Ruggia writes

S3611/A3450 will allow New Jerseyans early access to their earned wages. It’s another form of payday lending in disguise, structured to enrich payroll advance companies while potentially trapping low-income workers in a destructive cycle of debt.

I do not have a particular opinion on S3611/A3450. I have not studied the details. But that’s not important to this post. What is relevant is Ruggia’s opposition and reasoning. 

Note first that she immediately pivots to so-called payday lending, a form of ultra-short term credit that involves borrowing against one’s next paycheck within a few days of receiving it. Here is Ruggia’s take on it:

S3611/A3450 sets no fee limits, allowing companies to skirt New Jersey’s lending laws, or usury caps, designed to protect our residents from outrageous interest rates. For example, a $100 advance taken five days before payday with a $5 fee is equivalent to a 365% annual rate, far greater than the 30% annual rate allowed in New Jersey.

Note the package deal being peddled here. A $5 fee on a 5-day loan becomes an annual rate of 365%, even though the loan is not a yearly loan. It’s apples and oranges and it is deceiving. So how does Ruggia arrive at that erroneous assertion?

[These types of loans] can force low-income workers into taking back-to-back advances, trapping them into an endless and destructive debt trap. The National Consumer Law Center (NCLC) estimates that users average between 12 to 120 advances per year, and many take out even more than that.

Nobody forces anyone to take out these loans, any more than anyone is forced to borrow against his credit card.

Any form of borrowing can be abused, including credit cards. But so-called payday loans, like credit cards—a form of ultra-short term borrowing—can be a valuable financial management tool, as well. That’s why they’re popular among many workers. Yes, an irresponsible person can trap himself into a cycle of ever-expanding debt. But it’s he who traps himself, not the company that loaned him the money in good faith. Responsible people don’t let that happen, and should not be shut out from this financial tool to protect the irresponsible. 

The author portrays this type of lending as a corporate boon at the expense of the poor, evading the fact that lending is a mutually agreed-upon trade. Ruggia exclaims:

Lobbyists have portrayed this bill as an innovative solution for cash-strapped employees. But S3611/A3450 would only benefit the fintech and payroll advance companies seeking to enrich themselves at the expense of workers and their families.

I guess “innovative solutions for cash-strapped employees” is not a value. This is typical Leftist snobbery and self-serving delusions of superiority. Ruggia apparently believes that businesses are predators and low income people are too stuped and short-sighted to make intelligent, self-interested financial decisions. And those evil lenders, who make these financial management tools available, are only out “to enrich themselves at the expense of workers and their families.” No, they “enrich” themselves through their product offerings, just as workers advance their own financial interests by taking advantage of these loan products. Like any Marxist, Ruggia seems never to have discovered the principle of trade, in which each side seeks to advance her own self-interest through mutual agreement.

Ruggia finally gets around to acknowledging the value of these ultra-short term payday loans, albeit with a back-door plug for job-killing minimum wage laws:

Workers without access to ready cash could benefit from a variety of solutions. There is the technology to allow companies to pay workers early, free of charge, and there are rainy day programs and savings plans. The simplest solution would be to pay workers better wages to help ensure they don’t fall into ruinous debt.

Ruggia apparently doesn’t know that high income people also get into self-imposed financial trouble. Irresponsible financial handling is not a monopoly of low income—or “vulnerable” in Ruggia’s distorting terminology—folks. Yes, there are ways to plan for cash emergencies. But that’s no reason to legally take any financial tool away, and the state has no legitimate power to outlaw payday loans. It’s job is to police against fraud in the market, but otherwise leave people free to contract for the purpose of lending and borrowing.

This, from the Financial Justice Program Director for New Jersey Citizen Action, a statewide advocacy and empowerment organization that advances social, racial and economic justice for all. Justice for all--unless you’re the type of person who makes sound financial decisions, I suppose. Where’s the individual justice? What about responsible borrowers? Why should they be denied these loans? Why should a lender be denied the freedom to service responsible people with payday loans, if they have customers who want them? Responsible people and legitimate entrepreneurs are to be denied their freedom to voluntarily contract for the sake of irresponsible people. Of course, that’s “social” justice; that’s economic “justice”. And it is morally perverse. It is the opposite of the only genuine justice -- individual justice.

Beware the champions of “vulnerable” people. It’s your freedom and rights that they are really after.

Related Reading:

A Lesson in the Crucial Distinction Between Economic and Political Power

Limiting Access to Payday Loans May Do More Harm than Good—Paige Marta Skiba

One of the few lending options available to the poor may soon evaporate.

Where Does Valid Law End and Regulation Begin? -- my article for The Objective Standard

The Morality of Moneylending: A Short History by Yaron Brook for The Objective Standard