I’ve written before about how banking laws are for sale (some would say I’ve ranted before). In that post I discussed payday lending. I often hear that payday lending is not predatory and that such lenders must be offering a service, else why would people borrow money at 300%, 400%, 500% or even more?
I also hear people blame the victims of payday lending. Others say the borrowers are at fault for borrowing money at horrible interest rates. Even borrowers hold themselves at fault. When (if) they get out of the trap (and make no mistake, it is a trap with a cycle of borrowing the same money repeatedly, because the costs are so high people have great difficulty paying the debt without borrowing to do so) they still blame themselves for getting into it.
Many borrowers blame themselves for being stupid or taking the ‘easy way’ out. One person I know, when faced with the choice of becoming homeless or getting some money, said she thought the loan was an answer to prayer. “As I prayed for help,” she said, “an ad for payday loans came on tv. I thought God was answering my prayer.” Hundreds and hundreds of dollars later in interest, she thinks it was the devil.
Until it happens to you, or someone close to you, you probably blame the victim, too. “Why would anyone borrow at those rates?” you may ask. For most people, it is desperation. Undoubtedly there are a few who borrow because it is easy and they have no intention of repaying. I haven’t met any of those people, but “never say never” makes me believe there are probably a few.
What bothers me most is that payday lenders prey on the most needy and the least sophisticated. No doubt people of middle income take out some payday loans. But most middle income people have other resources, like credit cards (an unbelievably good deal at 30% compared to 400%), loans from their bank, or from family or friends. If you are in doubt of who the lenders prey upon, consider the location of the lending offices.
I happened upon some comments made by Dr. Steven Graves, a geography instructor at California State University in Northridge, California. I liked the way he logically stated the case, from a geographer’s point of view. Dr. Graves has been doing research on payday lending and has published some of his results. Here is his website, check out the “research” link. His maps are fascinating. Dr. Graves gave me permission to use his comments about payday loan victims. Here they are:
One of the problems with strict classical economics (or I should say economists that subscribe to classical economics) is that it (or they) appear to more interested in defending an economic system than the people who must live with it. It can be dogmatic. Some believe that since the economic system is has rational tendencies, the actors within it must exhibit them as well. If poverty or desperation or eviction or ignorance create irrational behavior among the actors with the economic system, then blame should be directed at the irrational victims of the system rather than dare tamper with the divine logic of the system. I’ve seen economists get red in the face arguing this very point.
Luckily, I’m an geographer rather than an economist. I think very few in the social sciences still subscribe to “rational man theory”, and most responsible academics take a more holistic view of politics, economics and society. Unfortunately, since a holistic view is both complicated and not particularly useful to those who benefit from the logic of American capitalism, classical economists remain very powerful in policy circles….but occasionally others get a counterpoint or two in.
For example, any assertion that payday lenders do not target or prey on the poor can be refuted by mapping payday lenders. Payday lenders’ site locations strategies lay bare the business model under which this industry operates, and from such maps its clear that they target populations made vulnerable by poverty, ethnicity, history or occupation (military). Measuring the effect of easy credit in a statewide analysis erases the differential effect such credit has on the variety of groups that live within each state….in geography we call that the ‘ecological fallacy’…but what do geographers know?
What do any of us know? I know the lenders are evil, not the victims.
Good post Devi. I have a degree in geography also. Geographers (me, at least) learn to see things from afar, sort of like a bird's eye view. Then we analyze where things are located in relation to others, patterns, anomalies, changes, etc. I took a course called geography of the city, which exposed the economic cycle of the traditional "inner city" which is laced with liquor stores and check cashing booths. Geography is actually a key element in many social, political, and cultural arenas, in addition to the more common uses like mapping topography, weather patterns, geologic patterns, microbes, animals, etc. (Plus it was a bit easier than engineering and medicine)
In terms of the rates you mentioned, were those per month? I realize you may have just been trying to make a point, but it is vital to include how long a period of time is involved when speaking of percentages based on compounded interest. This kind of confusion how credit card companies make a fortune. In fact, the "good deal" people think they are getting at 15% will end up doubling the amount paid for the item you purchased in only 6 months. And they don't stop there, the 15% percent is now being taken out of a debt which is now twice as large. So you are paying 30 percent on your purchase by the 7th month, and it just accelerates faster and faster. Not much of a deal, especially if you are broke to begin with. Any analyst will tell you how important it is to pay your credit card frequently, and for *more than the minimum amount due* to drive down the debt, not pad it.
I don't recall where I heard this adage, but it's worth repeating: people who understand compound interest, collect it; people who don't, pay it.
Of course, the interest people pay is inversely related to the money they already have: rich people are considered better credit risks, so they are charged less interest than are poor people. Payday lending outfits sit on the bottom rung of that ladder — lending money at the highest rates to people with the lowest credit ratings. It's just one of many examples of the high cost of being poor…a cost made even higher by the Bush Administration.
Many years ago, before buying a house, my wife and I decided to see if we could get pre-approved for a loan, and how much that would be. We were astonished to be told, first, that with a couple thousand on a credit card and a car payment "you have no debt." Secondly, when the banker had finished crunching the numbers, the loan we could get–easily–was about half again as much as we ourselves had determined we could reasonable afford. When we questioned this, we were told simply that here is our income, here is our average credit card payment, here's what you can afford to buy a house for.
"But you didn't include utilities, food, or transportation costs in that," I said. "That's easily a few hundred a month (this was a while back, but the lesson is pertinent)."
"That's not our concern," he said.
In other words, they were willing to give us a loan that would require us forgoing eating, heating, and traveling. I thought that was unethical and we could have actually managed to make that nut. For people jnust above the poverty line, it would have been impossible, but if they, too, "had no debt"–which I take it to me that they did not owe enough money to require virtually perpetual monthly payments in the multiple hundreds–they would "qualify" for debt-slavery.
Banks need to put their capital on the market in order to get a return on it and make money. That's a given. But there should be more practical limits on who and under what circumstances they make loans.
Too, the mindset of the average borrower needs to change slightly. I have known people all my life who simply accepted that they will always be paying out large amounts of their income to service debt, assuming they will never be free of it. They think we're strange because we never carry balances on our credit cards and we doubled up on our house payments to get rid of the debt–and now do not intend to buy another, larger house!
I think a lot of this came into being in the mythic boom times of the Fifties and Sixties when it really did appear that good paying middle income jobs were forever. We still seem to cling to that myth on some level even though we know it's not true.
The time value of money is always expressed on an annual basis for comparison. If the mortgage is 7%, they are talking about over one year, not over the 30 years of your loan. If your credit card is 25%, that is over a year, even if you only take one month to pay the balance. It is a red herring for someone to make the comment that "they only borrowed the money for a short time, so we should only express the interest for a short time." First, because to compare apples to apples, we need a common denominator, and we use 1 year as that common denominator.
And second, an enormous number of these loans aren't just 2 weeks or 30 days. Because they are renewed over and over (although lenders often try to hide the renewals to meet state law requirements and instead call them 'new loans' coincidentally made the same day as the payoff of the last), expressing the interest as less than annual rate is clearly inaccurate.
Ever since the 60s, when there was a real consumer revolution (remember "Unsafe at Any Speed" and Nader's Raiders"?), we have federal law (the Truth in Lending Act) that requires lenders to disclose the cost of credit in a certain way. I'm old enough to remember that before that law, one bank would say, "our interest rate is X" and on top of that would be a loan origination fee. The next bank would say "our interest rate is X +" and would have no origination fee. How can the normal person (like me, who doesn't do math very well) know which is the better rate?
Since that law was passed, lenders are required to take all the costs of credit, including the interest, and express that at an annual rate of interest (the APR). Now, no matter if Lender A says the interest rate is 8% plus an origination fee plus a document prep fee, for a term of 7 months, and Lender B says they charge 9% interest, no doc fee, but a smaller origination fee for 18 months, each lender must roll the additional fees in with the interest, and express that as an Annual Percentage Rate. Now we can compare apples to apples.