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Payday Advances

March 22, 2009

Some time last year I wrote a post about the roots of our consumer credit crisis and the subprime mortgage crisis. In that post, I likened the predatory lending and ultimate greed that caused our financial demise to the national behavior of Judah in the Eighth Century B.C.E.  The biblical poet Amos, writing during that time, chastises his audience for trampling the heads of the poor and taking advantage of social policies that extort them.  Surely the Lord will not revoke punishment.

Once again, it’s no secret that the bane of the United States’ existence is its dirty habit of taking advantage of the poorest people in the nation.  Some examples of this include the liquor stores and instant tax rebate stands on every corner in my neighborhood or, even more obviously, our nation’s unwillingness to provide health care to everyone.  To this list we should add the payday lending industry, one of the most infuriating injustices that exists.

Operations like Check Into Cash and Check ‘n Go occupy most rural working class areas, and they are especially prolific in lower class urban areas, like the derelict strip malls and shopping centers on Lexington’s Winchester Rd.

Daniel Brook’s essay in the current Harper’s, “Usury Country,” exposes how small-town entrepreneurs prey on poor people and fleece them of their money.  I suspect that most people reading this blog know that payday lending joints exist and perhaps even drive by them every day.  Yet few realize exactly how they operate, why they are so repugnant, or what we should do about them.

A typical payday loan transaction seems innocent enough.  If a person needs cash on March 22, say for an unexpected medical bill or for a rent payment to stave off eviction, he signs a few papers and essentially agrees to sell his forthcoming $325 weekly paycheck in exchange for an immediate $295.  He does this by writing a “bad” check to the lender.  Then, a week later, when he does actually get his $325 check on the March 29 payday, he must repay $325 to the lender.  The $30 is a fee for the loan.

The problem is that other expenses exist in life, and when March 29 comes around and the person gets his check, he’s of course already spent the $295 he got, and he’s dipped into the money from his March 29 check to buy gas, groceries, cigarettes, scratch-off lotto tickets, not to mention karate lessons for his son.  His only choice is to go back to the payday advance center and take out another loan for $325, plus a $40 fee.  The next week, April 5, he’ll owe $365, as per the terms of his new loan agreement.  But remember, his check on April 5 will only be for $325, so unless he does not spend a dime over the next week and manages to scrape together an extra $40, he’ll have to take out yet another loan, with yet another fee.  Without assistance from another source, this is impossible.  Payday lending is an endless cycle of crippling debt.

The numbers behind this industry are astonishing.  We convulse when we hear of credit cards that charge a 25 percent APR, but, most payday lending rates are at least ten times higher.  According to the Check Into Cash website, a $100 payday advance with a $15 fee equates to a 391 percent APR.  A $100 late utility bill with a $46 reconnection fee equates to a 1203 percent APR.  Clearly, most people would be better off charging up credit cards.

These rates are so absurd that common sense would suggest that only people on the extreme margins of society would partake of payday lending.  Such people are only the most desperate and almost certainly addicted to drugs.  The fact is that this is just not true.  According to Brook’s article, in the early 1990s there were less than 200 payday lending stores in the United States.  Today, there are more than 22,000 that serve over 10 million households each year.  It’s a $40 Billion industry per year, and there are more payday lending stores than McDonald’s restaurants  in the U.S.  What this tells me is that payday lending is extremely common, and that it is a relatively recent trend, a new scheme to take advantage of the most disadvantaged people in our society.

There are many complex reasons why people partake of payday lending services.  Some people actually are drug users and depend on immediate cash to satiate their habit.  Others suffer from oppressive medical bills and have no other access to credit.  Usually, though, such people live in denial and see their loan as a temporary strategy to make it through a rough week.  Payday lenders know full well that most of their clients do literally live paycheck to paycheck, and so they develop strategies to target these people.  And, if clients cannot pay off their debt at the end of the week, lenders ruthlessly go after their friends, mortgage holders, or landlords.

If these avenues prove ineffective, payday lenders will seek action through the criminal justice system.  They can do this because all loans are filtered through checks rather than “traditional” loan documents.

So what can we do about these enterprises?  Many states have regulations in place that limit the amount of interest lenders can charge or the amount of loans that can be distributed in a single transaction.  However, there are always loopholes around these laws, and most state legislatures see payday lenders as legitimate businesses that deserve the same rights and protections as other businesses operating in our free market.

Recently, in Kentucky, legislators passed laws that stabilize and protect current lenders.  We need to address state representatives and implore them to advance laws that aggressively root out exploitative payday lenders.

Another course of action is to circulate peoples’ stories in a way that calls attention to their needs.

  1. JeffKursman permalink

    Research shows payday advance customers to be middle-income, educated, working families, more than half earning between $25,000 and $50,000 annually. 58% having attended college, and one in five having a bachelor’s degree.

    The only way to reach the much-hyped triple digit APR is to take out one advance and continue to renew the same advance every two weeks for an entire year. State laws and industry best practices do not allow this to happen.

    Payday lending critics claim that the industry “costs” American families $4.2 billion in fees. But in 2006, consumers spent $4.2 billion in ATM service charges to withdraw their own money. They paid an estimated $22 billion in NSF fees to banks and credit unions, and banks collected an estimated $10.3 billion for overdraft protection services. Businesses charged an estimated $57 billion in late bill payment fees (more than 140 percent of the total estimated payday lending volume in the U.S.) And credit card interest cost consumers more than $87 billion.

    Payday lending opponents’ “cycle of debt” claim is not valid. CFSA’s Best Practices indicate that any customer who cannot pay back a loan when it’s due has the option of entering an extended payment plan. This option allows them to repay the loan over a period of additional weeks at no additional cost.

  2. Regardless of what research says about the types of people who actually do partake of payday loans (and whether or not they have the education to know better), the practice is still immoral, as are all of these practices that you’ve mentioned here.

    Banks are just as bad as payday lenders because they set up programs that are essentially payday lendings operations (like direct deposit advances). Some of these are automated, and customers often are charged fees (similar to overdraft fees) that they aren’t even aware of. This post on a Wells Fargo bank is a good example, and it’s no accident that Wells Fargo recently posted a huge quarterly profit, even while many banks across the US are failing.

    I have a lot less faith than you do that state laws and “best practices” policies actually do any good here. Payday lenders circumvent state laws by technically “settling” the score with one loan and then “reopening” terms on a new one. You can’t legally say that you are extending the terms of the same loan that way, and this is how they are allowed to legally string people along.

    The bottom line is that all of these practices–bank fees, payday lending, advances, credit card interest, etc.–are products of a culture obsessed by greed. And we can say with consistency that the people who suffer most from these extreme usury practices are minorities, poor, undereducated, etc.

  3. suzanne shelley permalink

    I have been stuck in the “catch 22” of the wells fargo direct deposit advance for a year now. I am damned if I do and damned if I don’t. Their answer to me was a “loan” which after explaining to me for half an hour I wAs then declined. Not to mention that if they had not swindled a measly 1000.00 wiping my account out I might not be in this predicament.

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