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Pay-Day Loans Are Devastating to the Working Poor
Without getting overly political as to the causes, one of the most startling aspects of the current U.S. economy is the phenomena of the working poor – individuals and households that work one or more jobs (most often more than one) and are still unable to climb out of poverty. In 2003, there were 7.4 million working poor in the U.S., roughly 24% of the entire U.S. labor force. It is a horrifying set of circumstances and institutional barriers that prevent people from achieving financial stability in their lives despite their best intentions, hard work, and dedication. For anyone interested in the topic, or for those who approach poverty with the typical assumptions and biases, I would highly recommend reading David Shipler’s The Working Poor: Invisible in America or Barbara Ehrenreich’s Nickel and Dimed: On (Not) Getting By in America.
Among the thousands of institutional barriers that exacerbate people’s financial difficulties, payday loans are one of the worst and most despicable. These are small, short-term (two-week) loans used to cover expenses until the loan can be paid back with the borrower’s next paycheck. Typical interest rates, on an annualized basis, range between 390% to 900%. Unfortunately, what happens is that when the loan is paid back with the following month’s paycheck, the borrower is in the same circumstance that drove them to take out the loan in the first place – in need of cash to cover basic living expenses. They therefore have to borrow the same amount of money again and pay the outrageous fee on the money they just paid back. They are, essentially, borrowing the same $100 or $200 again and again, but have to pay the fee each time.
In a study of payday lending in Colorado, it was discovered that 50% of payday borrowers used payday loans 8 or more times during the year, and 20% borrowed 16 or more times during the year. Because low-income borrowers, who are financially on thin ice to begin with, cannot pay back the loan in installments, they become trapped in a vicious cycle from which most cannot escape. And while the payday lending companies claim they are providing an essential service to people who often have no other alternatives to cover financial emergencies, two former employees of Check ‘N Go stated otherwise in a congressional hearing. These whistle-blowers stated that, without question, the business model of these companies consisted of only two elements: 1) target African-Americans and 2) trap borrowers.
Two of the common misperceptions about payday lending are also worth pointing out. The exorbitant fees are not risk-based. The average default rate for payday loans nationwide is 2.3% – far less than credit card default rates. As well, payday lending is not an inner city issue. With the explosion of payday lenders around the country (in Minnesota, there were 5 such companies in 1999 that lent $1,169,101 and 24 in 2006 that lent $58,280,035 ), 50% of all loans are made from payday lenders operating in the suburbs, 30% from rural locations, and only 20% from the inner city.
Payday lending is a horrendous phenomena that not only provides little or no value to consumers, but is actually a classic ‘debt trap’ that prevents the working poor from achieving financial stability. It has been outlawed in some states, like North Carolina, and is regulated in others. But these serial lenders have found ways to circumvent many of those regulations and continue to prey upon the most vulnerable in our economy. In 2006, Congress passed a law that limited the interest that payday lenders could charge military personnel to 36%, with the Department of Defense calling the practice ‘predatory.’ It’s time to apply this same standard to the rest of society.
[tags]Payday Loans, Payday Lending, Predatory Lending, The Working Poor[/tags]