Opinion

Based on the stimulus package, banks should start offering payday type loans immediately

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Op-ed views and opinions expressed are solely those of the author.

Congress just passed and the President signed into law a $2.2 billion stimulus package.  The bill will give $1,200 to almost every American adult and an extra $500 for each child they have.  Every small business will have access to low-interest loans. These funds will take three to six weeks to reach Americans, but consumers and small business need the money today.  The banks should respond.

In addition to the massive stimulus package which will accelerate economic growth significantly, once the coronavirus is under control, the Federal Reserve has vastly increased the money supply.  This gives banks trillions of dollars of extra funds to lend.  In addition, the FED also dropped interest rates to historical lows., meaning banks can acquire funds at a near-zero cost.

This sets the stage for a perfect lending environment.  On the consumer side, banks should use a concept developed largely by the private sector known as payday loans.  The unique feature of the loan was that it had a variable maturity.

Once the rate and amount were negotiated, the due date depended of when the borrower had the ability to repay.  For most, that meant when they got their next paycheck. It was a very safe loan for the lender as payment was guaranteed when the borrower’s next paycheck arrived.

The borrower, for what amount to a small fee, received cash that day to pay needed expenses.  Today the banks should offer any American with a tax return, a payday type loan. The amount would be up to the amount that the government was sending within the next few weeks.  Since the banks have access to funds at historically low rates, these loans will be very inexpensive.

The cost of the loans to consumers will be modest.  Let’s say banks charge consumers 8% interest for these loans.  If $1,200 is borrowed for three weeks, the interest expense would be $5.50.  If it took six weeks to repay the low, the interest charge would be $11.  

For a family of four borrowing $3,400, which is the maximum amount they could receive, the interest charge would be just over $31 for a six-week loan.  Even if the banks charged some processing fees, which they shouldn’t do during a crisis like this, the total loan cost to consumers would be modest.

Some tax preparing services already utilize a concept like this.  Once the preparer determines that a taxpayer is due a refund, the preparer offers a short term loan.  The maximum amount of the loan will be the refund amount due to the taxpayer. The loan is repaid when the refund arrives.  Using this loan, a taxpayer gets the refund immediately instead of waiting three to six weeks or more.

These loans get the money into the hands of consumers today.  That means today’s bills are paid immediately and, when businesses re-open, consumers have the money to spend on the goods and services that the businesses provide.  That will minimize the duration of the downturn.

Similarly, virtually every small business will have access to low-interest loans mostly from the Small Business Administration.  Knowing that the businesses could get short term loans, banks can lend to them immediately. That means they too do not have to wait for the SBA bureaucracy to approve the loan and get the funds to the borrower.

Commercial banks are already doing some of this by giving small businesses what are referred to as bridge loans, but the program should be expanded immediately.

No one knows exactly how long the coronavirus will last nor how severe it will get.  So far the government at all levels, seems to be reacting quickly. The mitigation efforts being implemented should help to minimize the negative health impacts.  The massive stimulus package, along with the massive increase in the money supply and the drastic reduction in interest rates will stimulate the economy once business returns to normal.

In the meantime to minimize the negative economic impact, both consumers and business need money in their hands today.  These short term loans will do just that.

Michael Busler

Dr. Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics.
Michael Busler

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