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Regulation of consumer credit could reduce credit availability, make credit more expensive

Todd Zywicki

Todd Zywicki

While regulation of the consumer credit industry is designed to protect consumers from abusive and deceptive practices, new laws may actually harm consumers by making credit less available and more expensive.

In a recent publication on the unintended consequences of regulation of the consumer credit industry, Todd Zywicki, a senior scholar at the Mercatus Center and a law professor at George Mason University, and Robert Sarvis, an economics student and fellow at the Mercatus Center, maintain that government restrictions on consumer credit “too often ignore the reality of how and why consumers use credit.”

“Consumers use credit for the same basic purposes as businesses: to make capital investments that return value over time and to smooth temporary mismatches between income and expenses,” Zywicki and Sarvis said.

Consumers use credit to make capital improvements, such as a car purchase that allows for convenience and savings on fares for public transportation. Consumers may also use credit to pay for a large, unexpected expense or an unexpected reduction in income. If the consumer is unable to obtain credit, it could pose a financially disastrous threat, as bill non-payment and bank overdrafts can lead to substantial fees.

Zywicki and Sarvis maintain that while regulation of the consumer credit industry is designed to protect consumers from expensive forms of credit, including payday loans and title pledge lending, consumers choose the credit product that works for them, adding that competition improves the terms of even the most expensive credit product.

“Well-intentioned legislators and regulators assume that restricting particular forms of credit will lead to fewer bad financial outcomes,” Zywicki and Sarvis said. “But this is misguided and can lead to worse, not better, outcomes. Restrictions on particular types of consumer credit don’t necessarily induce consumers to refrain from unnecessary purchases or to avoid bad outcomes. Consumers resort to these financing options because they have pressing needs. So repressing one form of consumer credit will often   lead to a shift to other new or existing forms of consumer credit offered on less favorable terms for consumers.”

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