High interest rates still better than no access
Charge 80% per year on a loan in the U.S. and you're called a usurer. Charge 80% per year on a loan in Latin America or Africa and you can be a poverty-alleviation charity.
Dean Karlan, president of Innovations for Poverty Action, and Jonathan Zinman from Dartmouth College set out to find out if consumers can be made better off even when borrowing at "excessive" rates from regulated financial institutions:
[We] tested this proposition. We worked with a successful finance company in South Africa to randomly choose some just-below-the-normal-approval-bar applicants to receive a four-month installment loan. The lender charged its normal rate: 200% APR. The remaining, just-below-the-normal-approval-bar applicants (the "control group") were rejected in line with the lender's normal credit policy.
We then tracked both groups over the next six to 27 months […] Applicants who were randomly approved for a loan had higher incomes, less hunger, better credit scores and more positive outlooks than their control group counterparts -- even after paying the high interest rate. Though they had higher than normal default rates, the borderline loans were also profitable for the lender.
The new borrowers did report higher stress and depression levels than the control group. But overall, the borderline loans objectively did more good than harm. Our findings are striking because governments that restrict credit access do so on the premise that consumers make themselves worse off by borrowing at high rates.
Full text in the Wall Street Journal editorial [subscription required].
Comments (2)
Bookmark
E-mail
Facebook
I am deeply moved by this research, but the fact is, it is the truth. Africans are exploited by so many financial support institutions in the name of loans or credit support. Yes, some governments do intervene with restrictions, but they are the main cause of the exploitations. They go in for grants for "development purposes" and end up using such grants for selfish purposes.
"Though they had higher than normal default rates, the borderline loans were also profitable for the lender. The new borrowers did report higher stress and depression levels than the control group. But overall, the borderline loans objectively did more good than harm".
Yes, but the harm is more harmful than the good. Neither Africa nor its vulnerable inhabitants can develop in this. What we need are more financial institutions, low interest rates, direct investment rather than foreign grants and of course, free trade.
Posted by: Nashiru Abdulai | Nov 27, 2007 1:25:03 AM
About this matter, borrowers or consumers still have their own choice when it comes to financial matters. I know that government is concerned about these people, but consumers are still the ones who know what is good and not for them, what are their needs and what is not so necessary for them. Thus, decisions must come from them.
Doctors and short term installment loans are two things that Americans should not have to do without. Healthcare is crucial in order to keep people healthy. For those financial emergencies, small consumer loans should be an option. If what the latest Physicians’ Foundation survey says is true, then doctors will definitely be feeling the sting. The Physicians’ Foundation strives to promote the safety of patients and doctor education. Seventy-eight percent of doctors who responded to their survey believe that there are already too few family physicians. Almost half of those who responded are angry that the government and HMO regulations have ruptured their ability to care for their patients, and some are even looking to quit their practices. As the population grows under this decree, the ratio of doctors to patients will eventually stretch to a breaking point.
This situation is very similar to the current events that are threatening our financial freedom. If the government and banks succeed in eliminating the consumer’s freedom to choose among various kinds of small-scale emergency financing – like installment loans – customers will be driven to less practical, undesirable alternatives. Studies, like the one conducted by Economics Professor Jonathan Zinman of Dartmouth College, have shown that the consumer’s economic well-being will drop if payday installment loan services are capped and wiped out. We all must demand a stop to overregulation. Every consumer must have the right to have a choice of health and a choice for any type of financing the best suits them. Click here to read more on http://personalmoneystore.com/moneyblog/what-are-short-term-installment-loans/
Posted by: Lisa P | Nov 25, 2008 3:13:46 AM