A proposal to step at 10% credit card drive rates receives support from politicians on both left and right. Lawyers claim that this policy will work in favor of potential borrowers that are no longer charged of 25% or higher.
But things are not that simple. Firstly, there is a simple economic argument against a limit about credit cardrente: companies will simply not expand the credit to borrowers with a higher risk if they are unable to obtain a higher potential payment to compensate for the risk of standard. (According to analogy, it is unlikely that you invest in a high-risk technical startup instead of blue chip shares, unless the potential payment is high enough to compensate for the increased risk.) And this outcome would be bad for those borrowers, because they would not get a credit at all. Certainly, an offer of a credit card with a high interest rate is better than no offer at all – below.
But many proponents of price controls on CreditcardeRente make one morally argument. They are concerned that credit card companies that charge high interest rates benefit from the lack of options of borrowers. In general, you would not be willing to accept an interest of 25%, unless you no longer have alternatives. Credit card companies therefore exploit the vulnerability of high-risk lenders.
However, price checks are a miserable solution. Remember that the problem here is that many borrowers do not miss good options to gain the money they need. Reduction The options of the borrowers by someone does not solve that problem – it makes the problem even worse. Borrowers now have even fewer options than before. To adopt a similar case, it would be perverse for the state to prohibit the sale of cheap tents to those who need permanent homes on the basis of the fact that this sale exploits their lack of home options.
Also consider the following moral argument at price controls on CreditcardeRente (it is comparable to one that I have bound At “price guts” restrictions):
If you do not offer credit at all, you can offer credit with high interest rates.
You are not allowed to offer a credit at all.
So you can offer credit with high interest rates.
Let’s break this down. First make the claim that if you cannot offer a credit at all, you can offer credit with high interest rates. The argument here is simple enough: receive an offer from something Is potentially better, and certainly not worse than receiving an offer of nothing. If the offer is better than nothing, the borrower will take it and therefore be better off. If it is worse than nothing, she can reject it and therefore not be worse off for receiving the offer.
Of crucial importance, borrowers themselves are in the best position to know whether they should accept the offer of a credit card with a high interest rate because they know their specific economic needs and prospects better than anyone else. An outsider may not understand why someone would be willing to use a credit card with an interest rate of 25%, but they are probably not aware of the specific circumstances that motivate the borrower to do this. Along the same lines, an outsider may not understand why someone would cancel his job for one with a considerably lower salary, but here we are happy to postpone the employee’s own judgment on their economic situation.
Finally, the statement follows that you were not allowed to offer a credit at all, simply from the fact that potential creditors have the right to make their own decisions about their money. If your neighbor is right on your door and offers you to pay $ 1,000 at the end of the month if you give her $ 950 today, you are not obliged to agree. You are definitely under no enforceable Obligation to agree – that is, no one can force you to do this.
Although the urge for caps on Creditrardente can be motivated by a commendable impulse to prevent the exploitation of the economically vulnerable, such a policy interferes both economic freedom and will probably help the people who intend to help.
Christopher Freiman is a professor of General Affairs at the John Chambers College of Business and Economics at West Virginia University.