Despite the largely positive economic direction of the country, a stubborn fact remains that 78% of Americans are still living paycheck to paycheck, according to figures from a 2017 CareerBuilders survey. Although wage growth has made workers’ paychecks a little bigger of late, roughly half of all households today still would have problems writing a $500 check for an unexpected expense. According to the Federal Reserve Board’s Report on the Economic Well-Being of U.S. Households in 2017, “four in 10 adults, if faced with an unexpected expense of $400, would either not be able to cover it or would cover it by selling something or borrowing money.”

In the last two years, one in 10 Americans has taken out a small-dollar, short-term loan as a means to help bridge a financial shortage between paychecks. These loans are often the best option for a difficult situation, giving consumers some breathing room and helping prevent a modest budgetary shortfall from spiraling out of control and leading to more debt through added late fees and penalties. Unfortunately, too many lawmakers in Sacramento still cling to a government-knows-best mentality and hold an ideological bias against these loans as bad for everyone. They are now moving forward with legislation (Assembly Bill 539), to cap a wide category of consumer loans at 36% interest, as well as set stricter terms on loan durations and penalties. Supporters are attempting to sell this bill as pro-consumer, but on closer inspection we see an entirely different story.

The legislation’s sponsors, Assembly members Monique Limón and Tim Grayson, may assume they are protecting consumers from loans they believe cost too much, but the cost of the loans reflects the high risk involved for lenders, and the short-term nature of the loans themselves. When government intervenes with an arbitrary price control that undermines the prevailing market price, the invariable result is higher costs and fewer choices for consumers. This is already happening in Colorado, where a similar interest rate cap was passed by public referendum in 2016, leading to the closure of many storefront lenders.rt-term loan is by far the best option when considering the lack of safe alternatives. If a sudden financial emergency or unforeseen expense arises and a consumer has no access to short-term credit, they could be left with some very unpleasant results, such as a repossessed car or foregoing a doctor visit for a child. Lacking ready cash in an emergency can have a devastating impact on a consumer’s finances, their job, or strike a major blow to their credit rating.

And while these loans do carry interest rates beyond the familiar credit card rates consumers are used to, they are an entirely different product. They are, by definition, unsecured and higher risk. Further, borrowers don’t pay rollover charges or compounding interest, but a fee based on the amount borrowed, charged as a convenience for access to cash when it is most critical. The convenience economy applies in numerous sectors, such as when a rental car agency hands you the keys to a $40,000 automobile for several days. Nobody would suggest the daily rate for the vehicle be comparable to a car purchased or leased. Different transactions have their own unique market value.

The legislation at issue may as well be an outright small dollar, short-term loan ban through proxy, as it will achieve largely the same results. Nanny-state legislators mandating prices will distort the market, leading to closures of many lenders, and leading to higher prices for less regulated services. Assembly Bill 539 will harm California’s most financially vulnerable consumers, cutting them off from credit just when they may need it most. For their sake, I hope that wisdom prevails in Sacramento and this legislation is defeated.