Managerial Economics & Organizational Architecture 6th Edition by James Brickley , Clifford Smith ,Jerold Zimmerman

Exercise 8

Title-loan firms offer high-interest loans (the interest rate can exceed 200 percent per year) to high-risk customers. The title of a car is often used as collateral. If the borrower defaults on the loan, the company can repossess the car. Recently, the financial press has reported stories of poor people who have had their cars repossessed by title lending companies. Legislation is being proposed in some states to make this lending practice illegal. A proponent of the law made the following argument. "The market for loans is very competitive given all of the banks, savings and loans, and finance companies. Outlawing title lending will make poor people better off. It will motivate the lending companies to provide loans with less onerous terms. Thus low income people and people with bad credit histories will be able to obtain credit on more favorable terms." Do you agree with this argument Explain.