“Oh, geez. I used to do that. It’s like a black hole you just can’t climb out of.”
I was at the bookstore talking about the pawn shop piece from last week and the piece I was planning to write on payday lenders when one of our customers made that comment.
I find it interesting that both my friend who took me with him to pawn electronics and the person who responded to my story assignment about payday lending declined to have their names used. One can argue part of it is privacy, and indeed, as one who has discussed some pretty sensitive aspects of her financial life in print, I understand a desire to not air all that. But I think part of it is also that these two methods of addressing financial problems are not necessarily things people are proud of or want to broadcast. In other words, there is still a stigma attached.
Payday lending provides small loans (usually less than $500) to people based upon a post-dated check that will be redeemed when the borrower’s next payday arrives. A $15 charge on a $100, 14-day payday loan would be considered an industry standard. If the loan can not be re-paid on time, an additional charge is accrued. So say I needed $300 by next week because rent is due. I could go to one of these places and write a $300 post-dated check, with the date of my next payday at the top, and an additional $15 for the fee. The fee is part of where the lender makes money on the transaction. If the borrower cannot make the full payment in two weeks, additional fees begin to get added to the loan. Now compare that with getting a $300 cash advance on a credit card with 20 percent interest. If you pay it off in two months—rather than two weeks—you will pay $8 in interest. That’s the interest charged on a high-interest credit card over two months! Compare with $15 in two weeks: almost twice as much in a quarter of the time. It hurts just to think about it.
Many of these places also offer car-title loans. If you have a clear title to your car, you can borrow against it. If you can’t repay, your car gets repossessed, which of course makes it harder to get to work.
In theory NC is not supposed to allow payday lending, thanks to a 2006 action by the NC Department of Justice. But a quick Google search shows that two places within walking distance of my house offer storefront cash advance services and car title loans. That seems surprising.
In addition there is the online version of this: You type into Google that you need a cash advance or payday loan, and you will find an assortment of online payday lenders who circumnavigate the state prohibition. NC is not alone in banning payday lending. In theory it is only legal in 27 states, but again the online option circumvents that easily; they happily will deposit money into your bank account via direct deposit—and just as happily begin drafting your account when the money is due. The overdrafts are of course your problem, not theirs.
According to the PEW Charitable Trust survey, the most common borrower is a female aged 25 to 44. Additional information within the survey suggests that divorced women who rent and are African-American or Hispanic are among the most frequent users. The Brookings Papers on Economic Activity report that nearly half of U.S. families don’t believe they could produce $2,000 to meet an emergency. I would say that for most of my adult life that has been my case, unless I had magically paid down that amount on a credit card recently.
According to the FDIC in 2011, households with annual incomes of $20,000 spent an average of $1,200 on money orders and check-cashing fees. Think about that: You are supporting your kids on less than $1,500 a month in take-home pay, and of that $100 each month goes not to feeding your children or paying the electricity bill, but to the fee for cashing your paycheck or the cost of getting a money order. No wonder people find themselves desperate for just $200 to $300 to fill in the gap.
It might come as a surprise to many people in encore’s readership that there are Americans without bank accounts or who live on the edge of banking with accounts they cannot close because they have accrued so many overdraft charges. Thus, they owe the bank too much money to be allowed to leave. I want to take a small tangent here to tell you a story about Jock and the Full Belly Project peanut sheller:
Repeatedly, people have told him he should patent the sheller, and many are surprised to find it is in the public domain. It confuses me endlessly that people seem to think the sheller would be a money-making venture. Jock, however, has the response that sums it up best: “The Cadillac doesn’t feel so good when it is paid for by the sweat of people who live on less than a dollar a day.”
Alas, that is not the sentiment held by the financial industry who know they have the poor by the short and curly: It is a spiral that can never be escaped. The Center for Financial Services Innovation reports that in 2012 Americans without banks, or in the scenario described above, spent $89 billion on fees and interest. For comparison sake: The Koch brothers were worth $89 billion last July, according to Forbes. By now they have no doubt surpassed that.
I fully admit: I regularly pay the power, phone and Internet bills for the bookstore and our household at the walk-up bill payment station on 2nd Street, and there is a fee charged for such services. Part of it is: Usually, I am getting up to the last possible day before I can afford to pay those bills, so a check in the mail wouldn’t work. Honestly, I have not ever gone to a payday lender probably for two reasons: I didn’t fully understand what they did before, and I have so rarely had a regular job with regular pay stubs that borrowing against a paycheck would have been a largely speculative experience. I mean for freelance writers it must go something like this:
“Well, I’m hoping to get at least four assignments next month—and we usually get paid within 30 days of publication, so if all that works out, could we make a deal?”
Somehow that scenario seems highly unlikely to end in the potential borrower’s favor. Though one could argue none of this ends in the borrower’s favor.
The Great Recession of 2008 has hit everyone, though some harder than others. For those with the least of resources, it has been harder than before, as fewer options are available. Perhaps we as a society need to ask ourselves if we can’t come up with a better option?
In several states, churches have begun lobbying for greater regulation to predatory lenders. I wonder if we couldn’t take it one step further and find someone of pooling resources as a community to create a better lending safety net for people who don’t qualify for bank help—or even the joy of credit-card debt. I have to say that having wrestled with credit-card debt for most of my adult life, I am stunned to discover there is a net worse than that, but apparently there is. With all the goodwill that exists in this community, there must be a way to make this happen.