Loan Sharks Or A Necessary Evil?

The Wall Street Journal today has an article about loan sharks in Great Britain. It explains how these predatory lenders take advantage of desperate borrowers and charge outrageous interest rates. In one story, a lender charged interest rates of up to 2,437%. He went to jail. But in another example, they talk about a lender who charged a lower 60% annual interest rate. That might seem excessive, or predatory, but it can even happen here in the U.S. -- legally.

First, here's part of the story from the WSJ:

According to his testimony in a recent court case, Mr. Ireneo went to a south London loan shark in April 2007, seeking money to send to family members in the Philippines after his bank refused to lend him any more. A friend introduced him to Greg De Guzman, a fellow Filipino immigrant to the U.K. who sat him down at his kitchen table and scribbled an agreement on a sheet emblazoned with his logo -- a mouse in a hat next to the words "General Speedy." He would give Mr. Ireneo £1,500 in exchange for £1,950 to be paid over six months, a deal that amounted to 60% annual interest. Mr. Ireneo signed the paper but never got a copy, he told a U.K. court in June.

Outrageous, right? Guzman ended up in jail. Yet, the same story would have a different ending in some parts of the U.S. There are states where predatory lending laws still allow seemingly legitimate firms to charge interest rates that make 60% look low. For example, check out "Cash Call," a California-based lender. This is one example I can think of, though there are likely numerous others like it.

Cash Call offers a personal loan for people with truly heinous credit. The loan is for $2,600, part of which you immediately pay back as a $75 fee. The annual interest rate is then around 140%. It's a 3-year loan with 36 monthly payments of around $300. That means you pay around $3600 per year, for three years, to have borrowed $2,600. The company is also careful to state:

CashCall reserves the right to change the rates and loan products listed below without notice.

Because 140% might just not be enough I guess. This can all be found on their website here. Cash Call has been around for at least three years, to my knowledge. So this isn't a fly-by-night operation. I've also heard its services advertised prominently in California: I recall hearing it as a regular sponsor of a popular Los Angeles radio morning show.

So is Cash Call a predatory lender? It must not be according to California law. If it were, the company would have been shut down years ago. Should it be? I'm not sure. While I find it hard to imagine why anyone would agree to pay a 140% interest rate, I've never been in a desperate enough situation or had bad enough credit to warrant such a consideration. Should the law preclude individuals in such situations from having the option to sign a loan at rates that high if they really need the money? I'm not sure, because presumably not getting that loan would have worse consequences for the individual.

Generally, if people know what they're getting into, I think that most loan contracts should be permitted. I'm just not sure why anyone would rationally be willing to pay interest rates in excess of 100%. Heck, I don't know why anyone would pay more than 25%. But maybe others can help explain. Feel free to give your thoughts as comments.