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Wednesday, August 22, 2018

Poor Consumer(s) Law: The Case of High-Cost Credit and Payday Loans

Samuel Becher (Victoria University), Yuval Feldman (Bar Ilan University) and I have a new paper we just uploaded on ssrn about behavioral law and economics, poverty and credit: Poor Consumer(s) Law: The Case of High-Cost Credit and Payday Loans forthcoming in Legal Applications of Marketing Theory, Jacob Gersen & Joel Steckel, eds., Cambridge University Press. Download it while it's hot and would love to hear your comments. Here is the abstract:

Consumers in general, and poor consumers in particular, often make counter-productive financial decisions that undermine their welfare. One key example is that poor people frequently use high-cost credit and loans with onerous interest rates. They are also disproportionately engaged in other types of sub-optimal borrowing, such as rent-to-own transactions and insufficient savings for the future. Although lenders and service providers are obliged to disclose interest rates and other key information in a clear and conspicuous way, disclosures have been at best only partly effective to prevent exploitation and protect consumers. This chapter seeks to examine how consumer law can, and at times should, respond to this reality. While focusing on borrowing practices, we begin by pointing to the main behavioral patterns that impact financial decision making. We first address biases that are relevant to all consumers: over-optimism, the present bias, and the behavioral economics of information. We then discuss the psychology of poverty and scarcity, which demonstrates that the state of poverty depletes cognitive resources and undermines the consumer’s capacity to overcome temptations, choose the uneasy paths and exercise long-term planning. Against this background, we discuss a variety of policy recommendations. We focus on protections that are better-suited to treat the root causes that lead poor people to make dubious financial decisions. We conclude by succinctly noting some of the challenges entailed in our recommendations and discussing ways to expand our proposed framework.

 

Image result for credit cards exploit

Posted by Orly Lobel on August 22, 2018 at 12:27 AM | Permalink

Comments

Orly, you may find, great interest here:

"EU Court rules Poland courts can cancel mortgages with unfair currency exchange terms"

https://www.jurist.org/news/2019/10/eu-court-rules-poland-courts-can-cancel-mortgages-with-unfair-currency-exchange-terms/

Posted by: El roam | Oct 4, 2019 8:09:40 PM

Always. I REPEAT ALWAYS! Look in to the company before if they ask you to pay before getting your loan.

Posted by: John | Apr 6, 2019 1:52:30 AM

Hello y'all
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SBM Finance | Local Fast Installment Loans

Posted by: sbm | Nov 19, 2018 2:03:55 AM

thanks we will read!

Posted by: Orly Lobel | Aug 25, 2018 12:54:35 AM

Orly, you may find great interest I guess, in that ruling, here :

http://www2.ca3.uscourts.gov/opinarch/171358p.pdf

Posted by: El roam | Aug 24, 2018 8:34:41 PM

thanks for these excellent comments. James the random acts of begging and giving is really interesting though outside the scope of our article. Matthew this is a very good question that we've also raised to ourselves - what does the data show on risky credit or even predatory lending as opposed to another perhaps worse alternative. we will read the article you link to and looking forward to delving in.

Posted by: Orly Lobel | Aug 23, 2018 1:03:37 PM

I look forward to reading this paper in tandem with this new article (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3208908), finding that decreased access to (some forms of) credit increased personal bankruptcy filings. In other words, are these credit transactions actually dubious choices? Thanks for posting, Prof. Lobel.

Posted by: Matthew Bruckner | Aug 23, 2018 10:31:57 AM

I have book marked it and will read when I have more time. However this caught my eye.

"We then discuss the psychology of poverty and scarcity, which demonstrates that the state of poverty depletes cognitive resources and undermines the consumer’s capacity to overcome temptations, choose the uneasy paths and exercise long-term planning."

I wonder if anyone has studied how online communities have come to shape the psychology of poverty. For example, the major online social media site reddit has a number of subriddits devoted to homelessness, vagabonds, etc. One of which is called "Random Acts of Pizza" where, as I understand it, people with money give people with less money free pizza. The whole setup they use to prevent scams and make sure free pizza only gets to poor people is fascinating. Online begging for free pizza has got to be an innovation that shapes how we think about poverty and how the poor think about their own poverty.

If the authors know anything that has looked at social media and the shping of poverty I'd love to know about it.

Posted by: James | Aug 22, 2018 4:54:24 PM

Very interesting , complicated and important issue you have dealt here with . It seems that you have ignored , very important factor , when dealing with interest rates and loans or mortgages , and it is the issue of :

Fixed rates V. variable rates

I don't know the situation in the US in this regard , but , variable , may cause many times , lot of troubles ( hard to predict the future change ) . I have fished something here for just introduction or illustration , here :

https://www.investopedia.com/ask/answers/07/fixed-variable.asp

https://www.uswitch.com/mortgages/guides/fixed-rate-or-variable-rate-mortgages/

Thanks

Posted by: El roam | Aug 22, 2018 7:37:28 AM

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