Friday, June 18

Predatory interest rates in Montana

While out grabbing some lunch in downtown Missoula, I was stopped by a gentleman armed with a petition. After having spent five years in Victoria, I was expecting a "save the whales" type of spiel, but he was actually petitioning for a cap on interest rates.

In Canada, the criminal code limits interest rates to 60% per year. But in the United States, it is left up to states to put caps on interest rates, and in Montana the cap is currently at 400% per year. Thus, a coalition in Montana is trying to get the the cap reduced to 35%. They are circulating a petition, and if they get the signatures of 24,337 registered voters in Montana, citizens will get to vote on reducing the cap on Nov. 2.

The law would target payday loan companies, which, since they are dealing with very short-term loans, tend to charge very high levels of interest. Proponents of lower caps argue that they help protect poor, vulnerable people. Opponents argue lower caps could put payday loan companies out of business and prevent people who really need a payday loan — and are willing to accept the higher interest rates — from getting money.

As an economist, I like to think that people are rational and thus are smart enough to know what they're getting into before they agree to a loan. If this were true, we wouldn't need any caps on payday loans since everyone would be a consenting adult and no one would be exploited.

But if people don't realize what they are committing to when they take out a payday loan, then perhaps it's appropriate for some kind of cap. But how on Earth do you determine the optimal cap?