Paydays and Predators

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Via TPMCafe comes a new report from the Center for Responsible Lending on how the payday lending industry exploits low-income borrowers. Here’s how a typical exchange might work in, for instance, Texas:

A borrower writes a check to the lender for the principal and interest. According to the center’s example, for a $325 loan, the borrower writes a check for $377, the principal plus $52 in interest. The money is typically due two weeks later, an APR of more than 400 percent in this example.

If the borrower does not have the $377 when it is due, they can pay another $52 fee. This does not pay down the principal; it pays to keep the loan afloat. According to the center’s study of the industry nationwide, “the average payday borrower pays $800 to borrow $325.”

Cracking down on rogue lenders seems like the obvious solution here. A better policy solution, though, as outlined by Anne Kim of the Progressive Policy Institute, would simply be to get mainstream banks to offer the sort of services—check-cashing, payday lending, etc.—that are in high demand among low-income families, making it easier to regulate predatory lending. As was noted after Katrina, poor families often don’t have bank accounts; but this is less because they don’t understand how banks work—as many suppose—and more because mainstream banks simply don’t offer much in the way of actually useful services for those low-income families. Payday-lenders, check-cashers, and pawnshops, on the other hand, do, and tend to proliferate in poorer areas. But because these services are so small and unregulated, they end up charging exorbitantly high fees and stripping billions of dollars in wealth away from low-earners. Vicious cycle ensues.

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Corrupt leaders the world over can (and will) try to shut down the truth, but when the truth has millions of people on its side, you can't keep it down for good. And there's no more powerful or urgent argument for your support of Mother Jones' journalism right now than that. We need to raise about $450,000 to hit our online fundraising budget in these next few months, so please read more from Monika and pitch in if you can.

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