InDebted: What if payday loans came with warning labels?
Should high-interest loans come with warning labels?
“I think that would work,” says Dr. Ozgur Ince, a professor of finance at the University of South Carolina’s Darla Moore School of Business. “I think that would probably have a fairly big impact on people's propensity to use these products.”
In South Carolina, there is no limit on the interest rate a nonbank lender can charge borrowers for things like installment loans. You might have received a letter or two in the mail offering you a loan – often in the form of a check – for, say $2,500. If you flip the letter over, the payout terms are probably on the back (they do have to be somewhere), and they will probably tell you the interest rate is somewhere north of 300 percent. Sometimes very north of 300 percent. I’ve personally seen offers with interest rates quoted close to 800 percent.
Dr. Ince’s idea, to put warning labels on some of these financial products, is directed towards something he sees as “an epidemic” of misinformed, sometimes misled residents who live close to or beyond their means, turning to financial products that they can’t escape. The idea, he says, just needs official support.
“The equivalent of FDA doesn't exist in financial products” to warn us of the risks of borrowing, as product labels on cigarettes and alcohol packages do, he says.
“[But] I can easily see a situation where we could treat these products the same way,” he says. “Then every payday loan would have to come with a disclaimer that would have to say, ‘Warning, these products can cause you a financial loss and hardship.’”
Putting warning labels on certain financial products isn’t an entirely new idea. Federal regulators contemplated sticking warning labels on prepaid debit cards back in 2013, but the effort was more of an idea bandied by financial reformers and never got any actual traction at a legislative level.
In South Carolina, where the small-dollar lending industry has a strong, active lobby and the effort to mandate financial literacy education in school flops every legislative session it’s brought up, the odds are long that the State Legislature would consider tagging loan products with warning labels anytime soon.
If they were to talk about it, though, Dr. Ince would want legislators to know that he doesn’t want to squelch access to loans, especially if they can help new borrowers build their credit. He just wants them to come with an acknowledgement of the risks.
“We don't want to cut off young people from the financial industry and financial products,” he says. “It's very important to use them responsibly. One could make the distinction between a safe product and potentially more dangerous products.”