MODULE 42: Lending Practices
Core Module Issues:
• When are credit card interest rates unacceptably high?
• When are payday loan interest rates unacceptably high?
• Under what circumstances is it acceptable for credit card companies to
lower customers’ credit limits?
Module Teaching Notes
All of your students will presumably be familiar with credit cards and the high fees and rates of interest that
come with them. Many may be unfamiliar with payday loans.
There are two basic issues that go with credit cards and one that goes with payday loans in this module.
Credit card issue #1: Is it fair for credit card companies to drop credit limits (or cancel cards altogether) not
based upon a specific customer’s actual behavior (as in, he misses payments, etc.) but based upon his
GENERAL CHARACTERISTICS? If a customer is employed in an industry that has met with a wave of
layoffs, or lives in a zip code that has seen more than a usual number of home foreclosures, he is
statistically more likely to default on his credit card payments at some point. But should general statistics
impact a specific customer?
Car insurance rates will be a familiar point of comparison for students. Young drivers (especially young
male drivers with sports cars) pay much more for insurance because, as a group, they are more likely to be
in an accident than, say, an older driver in a Volvo. I often ask students whether car insurance rates are
fair, and whether the practice of general traits impacting individuals is ever reasonable. I often get spirited
comments here.
Credit Card issue #2: What is the highest acceptable rate of interest that a credit card company can
charge? When does it become “loan sharking”?
This issue largely sets up the last issue on payday lenders. Even high rate credit cards fail to come close to
the interest rates charged on a typical payday loan.
Payday loan issue: Should these loans be allowed at all? They have certainly become popular. TV and
local radio ads are usually full of offers to “walk out with cash today in as little as 15 minutes! Bad credit?
No Problem!”
But the largely unregulated (in most states) payday loan industry charges rates of interests that are often at
least an order of magnitude larger than those allowed to credit card companies.
Consider showing an example of how much is paid to a payday lender if a loan is “rolled over” for a year.
For example, a $1000 loan with a $100 “fee” every two weeks pays $2600 in interest over the course of a
year.
Are these loans ever defensible? Should consenting adults be able to make any deal that they both agree
to? Or do these loans exploit desperate people?
Lively debate often follows the scenario’s questions.
Discussion Points for Scenario Questions
1. Do you favor Eric’s company raising the standard interest rate on their credit cards from 17
percent to 25 percent? Why or why not?
A. OK – AT WHAT POINT IS THE RATE TOO HIGH? WHAT IS THE RATE ON
YOUR OWN CARDS?
B. NOT OK – ISN’T EVERY BUSINESS ENTITLED TO MAKE A PROFIT?
2. Do you favor lowering credit limits for customers in “at–risk” demographics?
A. YES – ISN’T IT UNFAIR TO LET GENERAL TRAITS IMPACT SPECIFIC
PEOPLE? ISN’T THIS DISRIMINATION?
3. Is there any difference in lowering the credit limit for someone whose personal behavior has
placed him or her in an “at–risk” demographic? For example, is it more fair to cut the limit of
someone who buys a lot of luxury items than it is to cut the rate for someone who is in a
profession that recently laid off a large number of workers?
A. YES – WILL A LOT OF PEOPLE ALWAYS USE ALL AVAILABLE
CREDIT? WILL YOU?
4. Should Eric’s company get into the payday loan business?
A. YES – BUT WON’T THEY BE USING PEOPLE AS A MEANS TO AN END?
[IF YOU DID THIS MODULE EARLIER IN THE COURSE – DO PAYDAY
LOANS VIOLATE KANT’S PRINCIPLE OF UNIQUE HUMAN DIGNITY?]
5. Although a few states make high-interest payday loans illegal, the majority do not. Should
Congress or state lawmakers in the other states place limits on acceptable interest rates? If so,
what is the maximum annual rate of interest that you find acceptable?
A. YES – WHAT SHOULD THE RATE CAP BE