“As Ronald Reagan said, the scariest words in the English language are, “I’m a politician and I’m here to help.”
Analysts report that a 2007 law protecting service men and women from so called predatory lenders has ended up making it incredibly difficult to get short term loans or credit. This law ends up becoming a good example of how even the best intentions can create unintended side effects that are often unforeseen. In many cases though, it shows us that Americans should be weary of politicians’ efforts to use the government to help.
The sentiment behind this law was great despite being misguided. The short term pay day lenders that are under increasing scrutiny are called predatory because of their high interest rates — some reach between 200% and 600%! At face value, that sounds outrageous. But what many fail to realize is that complaining about the yearly interest rate on a pay day loan is like complaining about the monthly rent at a hotel. If you multiply the overnight rate by 30, you would likely pay enough money to cover the mortgage of a Malibu mansion. But the short term nature of the stay means that the overnight rates are higher.
Many people fail to consider how pay day lenders provide a similar short term service. They not only have to provide thousands of dollars at short notice, but have to make enough money on the loan to pay their overheads such as rent, utilities, and employees that process the paperwork. That often means they only make about $50 per loan, but the sticker shock of the yearly interest rate makes it sound horrible. Stricter lending laws are a way for politicians to seem like they care about the poor, but by making regulations increasingly strict it makes it more likely that those with poor credit are pushed into the arms of actual predatory lenders.
This is exactly what is happening with military families. If they have bad credit or little money in the bank, they have few options but to either lie about their status, or visit loan sharks. This hardly helps their situation.
In this case, analysts had pointed to the consequences of stricter lending laws, yet politicians passed the law anyway. The law of unintended consequences is ignored in many other cases as well. Raising taxes usually leads to lower revenue, but taxing the rich is often a winning issue for politicians. Affordable housing laws lead to some of the highest housing prices in the country. The Affordable Care Act raised the price of insurance. Attempts to lower the cost of education through Pell Grants and loans increased the cost of tuition. This list goes on and on.
It’s great that politicians seem like they want to help. But it’s important to consider how they are just as self-interested as everyone else. And in this case, it’s in their self-interest to look like they are helping by passing laws that protect borrowers in the military. But, it’s the people’s responsibility to hold politicians accountable for the consequences of their bills. In short, as Ronald Reagan said, the scariest words in the English language are, “I’m a politician and I’m here to help.”