I know this would never happen to YOU because YOU are super smart and fiscally responsible, but what do you suppose dumber, less responsible people do when they find themselves short of cash?
In the United States most of the poorest families are headed by single mothers.
Let’s suppose, for the sake of argument, that for someone who finds herself short of cash, asking her mother or grandmother or some other person in her life to lend her some money until payday is not an option.
She also has no savings. Seriously, if a woman had money in the bank, she wouldn’t need any extra money to get herself to payday, right?
So, a woman’s rent and her electric bill and her heating bill and her car insurance are all due in the same week and she still has to buy groceries so that she and her kids -- let’s say she has two kids -- can eat every day this week. No matter how she rearranges the money in her budget, there just isn’t enough to pay everything on time.
The woman can’t skip paying one of those bills because if she fails to pay on time, she loses the service. It would be bad enough if she just had to pay the outstanding bill plus an additional penalty to get the service reinstated. But she can’t go without heat or electricity until she can scrape up the money to get things straightened out and she has to have insurance on the car so she can legally drive to work.
Well, she might, if she were desperate enough, go to one of those payday loan places. You know, the kind of place where people borrow some money on Monday and pay the money back, plus interest, on Friday when they get paid.
Great solution, right?
The bills get paid. The family eats every day. And on Friday, the woman settles up with her loan shark -- I mean, lender -- and everyone is happy. Right?
Everyone but the borrower, that is. Because that loan she took out on Monday for $100 costs $150 to pay back. After the woman pays her loan shark, she doesn’t have enough money left to pay her bills for the upcoming week. So what does she do? She takes out another payday loan.
For $150 this time. And next Friday, it costs $225 to pay back.
Chances are most people can’t spin in this cycle for an entire month before the amount that has to be paid back to the lender is more than a person takes home in a week. Now the borrower is screwed. Unlike Louie the Loan Shark, payday lenders will allow a person to rollover the loan if it can’t be paid back on time, but where Louie would just break a person’s leg and be done with it, a payday lender will gladly tack on additional fees and interest for as long as the loan is outstanding. The original $100 that our theoretical woman borrowed could end up costing her thousands of dollars by the time she pays the loan off.
Payday loan places are the extreme example, but those of us who qualify for credit cards also know what the trap looks like: You use a credit card just to get out of a tight spot. But if things are that tight to begin with, they will be even tighter when you have to include a credit card payment in an already stretched-to-the-limit budget. And, of course, if you fail to pay off the balance in full, the interest builds.
Now what if I suggested that the theoretical woman who used such a foolhardy measure as a payday loan wasn’t stupid or irresponsible? She was just desperate.
Desperate people do desperate things. And wherever there are desperate people, there are usually predators waiting to capitalize on that desperation by providing an option that looks like a solution. That’s why there are so many shady loan places in poor neighborhoods and near military bases. People who have already tied a knot at the end of their frayed rope are the ones most likely to take out a nearly unpayable loan.
Of course, a person doesn’t have to drive to some seedy neighborhood to get a payday loan. There are countless websites for fly-by-night lenders and otherwise reputable major banks that are available twenty four hours a day to help people by shackling them to a bad loan.
Did you get that?
Major banks, like Chase, Wells Fargo, and Bank of America, that used to only write loans that were backed up with real collateral will now issue payday loans directly or fund fly-by-night companies to issue the payday loans for them.
Most people who take payday loans or put things on credit cards think they have a plan to get caught up. They’ll catch up when they get their bonus, or when they get some overtime. Sometimes they think if they budget well enough, they can ride out a tight time right after they pay a few things off. But, of course, if something goes wrong -- if an unexpected expense like a car repair pops up -- then all bets are off.
The average APR on a credit card in 2013 is around 15%, which isn’t too bad. Of course, it only takes one late or missed payment to drive that interest rate up to a range from 20% to a staggering 30%. And payday loans? They routinely carry an interest rate of 50%, so only someone with no other viable option would even consider such a loan.
So, why not pass laws to limit APRs so that predatory lenders can’t gouge desperate people who are just looking for a helping hand?
Many US states already have laws against usury.
Usury is the practice of lending money and charging exorbitant interest rates. In Western cultures, usury has traditionally been considered such an unfair practice that even ancient cultures, which thought slavery was OK and stoning someone to death was jurisprudence at work, decried the practice of gouging people financially.
In the US, national credit card companies and other lenders get around state usury laws by moving their operations to states with lax usury laws. Every credit card I have ever carried had me mail my payments to either Delaware or South Dakota, where the usury laws are much less restrictive than in my home state of New Jersey. In 1980, the US Supreme Court ruled that this was a reasonable practice.
A payday loan place on a corner in a poor neighborhood in Los Angeles probably has its corporate office in South Dakota or Delaware. They can charge whatever they want for interest on a loan because California state law does not apply.
So what about that credit law Obama passed in 2009?
That law prevents credit card companies from raising rates on individual credit accounts without 45 days notice and it provides grace periods around due dates so that individuals who do make timely payments are not gouged if a payment isn’t entered into a lender’s system by close of business on the due date. The law does not, however, do anything to cap interest rates or fees charged by lenders.
I understand that lenders lend money to make money. That’s capitalism at work and I am fine with that.
I, myself, have a credit card that I use for emergencies or unusually expensive purchases, and I work like the devil to make sure I pay the balance off in full within the 30 day interest free grace period. But don’t worry. The poor credit card company is still making money because every time I use the card, the vendor who allows me to pay with a credit card pays the credit card company for the privilege of allowing shoppers such as me the convenience of paying with plastic.
Not everyone can qualify for a credit card or a reasonable loan from a reputable company. Of course, I know everyone in the US absolutely hates the poor because poverty is a disease that only attacks those of substandard moral fiber. So who cares if truly poor people can’t make ends meet, right?
The trouble is, in today’s economic climate, many working class and middle class families, where both spouses are working full time jobs, have their backs pressed against the wall. Many may be willing to tempt fate in the short term to keep the heat and electricity running and to keep food on the table. And most of those who do take a shady loan just to get past a tough spot are likely to regret it.
Is there nothing that can be done to prevent desperate people from falling prey to unscrupulous lenders?
Since we, as a nation, have already decided that laws against usury won’t work, maybe we could do things to keep people from being desperate in the first place.
If the federal minimum wage were raised high enough so that a single parent working a full time job brought home enough money to approach the poverty line, maybe people wouldn’t be so desperate.
Or maybe the federal government could adequately fund programs that already exist to provide help for low income families with food, heating costs, and things like that. Adequately funded federal programs could potentially translate to more generous state policies that would allow more families to qualify for help.
We could even consider standard of living wage increases or tax breaks so that paychecks would keep up with rising prices and working class and middle class families could keep their heads above water in tough economic times.
Wild ideas, I know. And I’ve given no thought to where the money to fund these pie-in-the-sky plans would come from.
Certainly, we can’t expect wealthy people or multibillion dollar corporations to contribute any of their vast resources to the common good. Humane policies that help working people might kill some power broker’s capitalistic incentive. After all, you can never be too rich, too thin or have too many vacation homes.
So, working people, don’t worry if prices keep rising but your income stagnated sometime around 2008. If you just exercise some self control each month, you can squeeze $2500 in expenses out of $2000 of income.
Three meals a day in a well lit, heated room is a luxury you’ll just have to earn.
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