I just read a heartrending book (“Broke America”) which deals with the ways that b the poor and financially unedcuated are eploited in America.
I’m taling about the “paday loans” business (up to 800% APR!), tax refund anticipation loans (690% APR), “Rent To Own” stores-where the poor dupes pay 3-4 times the retail prices.
The book authors interview a young man who set up ship in Dayton Ohio (an old rust belt city plagued by high unemployment)-he is now a multimillionaire (he owns 230 check cashing and payroll advance loan business offices.
When questioned about his activities, he essentially said “if it wasn’t me, it would be somebody else”!
What I got from the book, was that this man’s victims apparently never learned about compound interest, loans, and credt-they went from one disaster to another-even a well-heeled GM retiree (over $55,000/year income from pension and SS), was blowing $3000/year on interest on loans. The concept of saving up and paying cash made no sense to them-they had to “have it now”.
This business is so profitable that big banks (like CITIBank) have gotten into it-with appropriate “front” compnies 9to shield their image)…
Then, another part of me says (echoing a famous Persion poet-Hafiz"
“if a man shoud wager his money, risking shekels of silver and gold, take the fool, my son, praising Allah-such men were made to be sold”.
Howdo you feel about this issue? Legitimate business or terrible exploitation?
Legitimate business. Unless loan percentages can be capped by law, then why can’t I run a business offering money at 800%?
Sure, it sucks to have to resort to borrowing from these places, but the only reason that people use the service is because banks aren’t interested in one or two week loans.
You could say the same thing about McDonald’s offering fast food at what appears to be a reasonable deal; except if you were to budget and plan meals properly you could save a lot of cash by not picking the easy way out.
No one is forcing people to borrow at high interest rates, or to spend $5 on a meal that you could make at home for an order of magnitude cheaper. Fast loans: fast food. There will always be a need.
I think this is going to divide along partisan lines.
As a liberal, I feel taking advantage of people in this way is morally wrong. I don’t feel ‘sorry’ for the people who get taken, but I am saddened that such ignorance is allowed to proliferate. Some people, of a less liberal nature, might say ‘Well, if they don’t like being in debt they can educate themselves and take steps to remedy the situation. By taking their money, we’re teaching them a lesson! It’s the American Way, and anyone who objects wants to turn America into North Korea!’ Only, I many people lack the ability to ‘educate themselves’. They need to be helped. And taking their money isn’t helping. Such schemes as ‘payday loans’ keep them in a cycle of debt that is not only detrimental to the ‘victims’, but also to the economies of local areas and, by extension, to the country as a whole.
Thus I think such businesses need more regulation, so as to protect people from their own stupidity or ignorance. And I think Americans need a reality check. We’re spoiled. We want everything, and we want it now. I’m not saying we should be deprived; only that we lighten up on the materialism and learn that non-essential things can wait. Do I want to build an extension on the house and have an awesome and enormous new kitchen? Do I want a garage? Do I want a wider driveway? Sure! But it would be irresponsible for me to go into great debt to get them. I have a kitchen. I have a place to park. I can make-do with what I have until I can afford to upgrade. On a smaller scale, my 26" LCD TV is good enough. I don’t need to impress anyone with a bigger screen. I don’t need to buy a new car every two years. I don’t need the latest fashions. Sure, I have a few ‘luxury items’; but if I were in a position where I had to rely on payday loans, I would apply my resources to getting out of that situation – which seems to be a difficult thing to do once you’re in it.
I’m with Johnny L.A.. We are supposed to be a community, a society that holds bonds between individuals because we are Americans. Predation? Profit from the ignorance, bad luck, or character failings of others?
Many people like to claim that the United States is a Christian country. If this were true, we wouldn’t see anyone willing to make profit by gouging the poor. Jesus’ teachings centered around how his followers were to treat others - their neighbors, their brothers, and most especially, the poor. A real Christian capitalist would find a way to provide the services needed - short term loans - without leaving the customer the worse off for it.
Around here the Payday Loan places have sprouted up like mushrooms over the past 10 years, and these companies together contribute a HUGE amount of campaign $$$ to various Utah State Legislature members, who shockingly have voted down any attempt to regulate the legalized loan-shark business.
Our elected leaders (99% of which are self-professed good, upstanding Christian men) seem to have no problems grabbing piles of money from these modern day Shylocks, seemingly without any concern about where the money came from in the first place.
phouka - The thing is, most of these loans aren’t for needs, they’re for wants. Slightly different scenario - the person would’ve been better taking a usurious loan - but I had a co-worker who wrote a check for a pack of cigarettes. For a (at the time) $3.50 pack of cigarettes, she ended up paying about $50 in bounced check fees. Now, people can rail about the way banks process checks, but the fact is, she wasn’t buying milk for her starving children, she was buying cigarettes.
My brother-in-law does taxes for HR Block, and tries to talk people out of doing the rapid refund. These are people who can’t afford to lose the extra money, and for the privilege of having their money two weeks early they give up precious dollars. And say they want the money to buy speakers for their car or an equally non-essential thing they need right now. For that matter, many of these people could just as easily file a 1040EZ themselves, not pay Block for doing their taxes, but they’re willing to pay for service just so they can get their rapid refund.
Some people have no concept of self-denial, and are willing to put themselves in debt for stupid reasons. You can’t save people from a lifetime of poor decision-making. I can guarantee you that the loan paperwork spells out exactly how much they’re going to pay, but they don’t care, they want their money NOW, not in 5 days when they get paid. And businesses depend on that lack of self-control.
StG
To my mind, the issue is a balance: how much inconvenience by way of restrictive regulations do you want, to protect people from their own impulsive behaviours?
Similar issues are raised by credt cards, gambling, booze, etc.
The answers to my mind are not obvious; there is a range. In terms of payday loans, I think that they ought to be allowed, but some controls on the amount of total interest imposed, so they are not excessively exploitive. That is the situation here in Canada, which has a criminal rate of annual interest; the payday loans outfits have been hit with multiple class proceedings for violating this.
An outfit providing payday loans within these limits is acceptable to my mind - like a legal gambling outlet, or for that matter, a credit card company.
I feel really bad, 'cause these people do not understand. I know plenty of hardcore intercity people that can’t understand how these people are taking advantage of them. Heck I’ve had to explain Three Card Monte to most of them as they can’t figure out how they always lose while everyone else wins.
I’m not slamming them but some of these people are about at 5th grade education. Would you let a 10 year old take out a loan? They’re supposed to be adults and physically they are bu they aren’t educated enough to see how badly they’re being conned.
Oh it’s legal, but that doens’t make it right, especially since, those people are not really understand what is going on.
Sounds more like an argument for some sort of paternalistic controls over the (financial) habits of the poor and uneducated.
Some people need paternal control!
As I said, I have moral issues with preying on the stupid. That aside, there are other issues. Let’s assume for the sake of argument that if some poor people had extra money, they would not rush out to spend it on drugs or alcohol. Let’s assume instead that people have made some very poor choices or suffered a setback where they need cash to cover expenses. Payday loans are a temporary solution. Except that when you’re paying 300% interest, it’s hard to regain equilibrium. There are very few businesses that have only one customer. Most have wider customer bases. So let’s say a thousand people in an area use payday loans. They pay x amount of interest to the payday loan company. The payday loan company uses that money to pay their employees, pay taxes, and so forth. But the money is concentrated from the pockets of 1,000 people into the pockets of a few. Those few will use the money to buy consumer items, and probably more-expensive consumer items than the poor people would. But how many of these consumer items does one person need? I only have one washing machine and one drier. I have two TVs, but only use one of them. Will 100 payday loan employees each buy ten washing machines? Wouldn’t it be better if 1,000 people bought one each?
I fully admit that’s a gross simplification. But I think it’s valid as far as it goes. If 1,000 people have money for consumer items, more consumer items will be sold than if only 100 do. Thus money in people’s pockets stimulate the economy, resulting in more people who have money to spend. People paying lower interest rates on their loans will be better situated to climb out of the holes they’ve dug. Some won’t. But most people can be taught.
I think there is a need for the payday loan business. But allowing them to charge too much interest depresses the the economies of the places they’re in. If you’re in business you want to be profitable. To remain profitable you have to have a customer base. If your business is charging interest to borrowers, your rates need to be payable or else you’re not going to get paid. Capping interest rates ensures a reasonable profit, while not destroying most people who take advantage of your service.
A lot of people believe that the game is to get as much as they can, and screw everyone else. ‘I’m all right, Jack.’ But like it or not, we live in a society. A society must have ‘socialist’ rules to ensure its survival.
Completely agree. As a bleeding heart liberal, I guess I’ll cross party lines on this one. I disagree that this sort of thing requires regulation to protect people from themselves. Very, very few things require that kind of intervention.
If you don’t understand the terms and consequences of a contract, you shouldn’t enter into such an arrangement. That’s the extent of my advice and sympathy.
That’s just it. It’s easy as hell to condemn someone who takes advantage of a person who needs to buy food. In fact, we consider the necessities of life so important, there are hundreds of charities which provide them. It’s much, much easier to take advantage of those who lack the foresight, restraint, or patience or are addicted to nicotine, gambling, or shopping.
I used to keep a bowl of chocolate on my desk at work, so people would stop by, grab a fun-size candy bar, and chat for a bit. But, one of my coworkers had a habit of cleaning me out. He always bought replacements; that wasn’t the problem. The problem was that he was diabetic and refused to follow any of the medical advice for his disease. His blood sugar, when he measured it, was regularly into the 300s or 400s. Now, he was a grown adult, so no one - including me - had the right to force him to test his glucose, take insulin, or modify his diet.
I still removed my candy bowl, because I will not help another person damage or destroy themselves. Not willingly.
And I sure as hell won’t profit by it.
It sure would be nice if other people shared those scruples. I think we’d have a better world for it.
I think if you do an honest cost/benefits analysis, it’s pretty clear that stricter industry regulation would alleviate real harm, while approaching the problem from the other way around (apart from being completely impractical) would have the same effect on the lenders, anyway. Obviously, they would not be able to stay in business if they had to depend on people who were making intelligent, informed choices. The only people who are going to be willing to pay 500% APR for a loan that is ostensibly for a very short term are desperate people - people who don’t have any surplus in their budget to speak of. Once they’re on the hook, it typically snowballs into an unmanageable debt, because their next pay is even shorter.
I remember reading that it was fairly typical for people to end up paying $800 on a $300 loan. Any “legitimate business” that is comfortable putting the squeeze on someone for that much in exchange for a short-term eviction-avoidance ought to be dealt with the same way we deal with leg-breaking Jimmy One-Eye. There’s nothing extraordinarily paternalistic about protecting people from villains like these.
As I’ve already said in my previous post, I broadly agree: I have no problems with regulatory restrictions on the amount of interest chargable, for example.
The balance here is the balance between how much regulation, how stringent the controls, one wants vs. the inconvenience of imposing the regulations.
Credit cards raise similar issues. Credit card debt is a serious problem, because it is high-interest and penalizes people who are not clever with financial matters. Yet few would support removing the ability to have credit cards.
Payday loans are short term loans at high interest. The high interest is in part justifiable, because they are also risky loans without security. I agree that there ought to be consumer protection from unduly exploitive terms - I’m no libertarian - but damning the entire industry strikes me as excessive. Short-term loans fill a need - not necessarily one I agree with, but whatever - and I’m not in favour of legally dictating to others what their needs ought to be in the name of paternalism. That way lies many a failed experiment - prohibitions on booze, drugs & gambling (particularly for the poor) spring to mind.
way back when home economics was taught in school. you learned about bank accounts, loans, and morgages as well as how to cook and sew.
i had a class in high school called economics that taught nothing related to personal finance. it was a wasted hour a week for a year that really had no relevance to economics you could use.
having a class on personal finance in high school would have really been more helpful.
It is usury. But we allow states to make the determination . A couple states have essentially eliminated usury laws. That is where banking institutions and pay day lenders claim as corporate headquarters. That allows them to sidestep a states rules and charge exorbitant rates across the nation.
I suppose in a crisis a poor person might go to one with the idea of quickly paying it back. But if they don’t catch up, they could get in a serious financial hole that will destroy them. It happens frequently.
The problem in my mind is the “have it all now” attitude. It’s a tough call for me. I feel the same way I do about this as about the predatory mortgages. There is definitely some responsibility on both sides. I feel for those who are “duped” but at the same time I think that they are partially responsible.
A more interesting question is whether delayed gratification is learned behavior and if so how early is it fixed? If you go back to the Stanford University “marshmallow” experiments cite(in which I was apparently a participant), they have followed the subjects for over 40 years and the ability to delay gratification was apparently present by age 3 or 4.
I do notice some errors in the Wiki article but the descriptions are essentially correct except that participants were ages 3 or 4 and the studies actually started in the 60’s).
I’m really torn on this; yes, an adult has a responsibility to look after themselves and not make stupid decisions, but someone who has never had the benefit of learning how to look after themselves better may not even realize they’re making stupid decisions. Does society have a responsibility to somehow teach everyone some basic financial skills so they don’t become victims of loan-sharking legitimate companies? I’m not even sure you can argue that people don’t know payday loans are a bad idea; that has to be in the general consciousness by now, like the idea that drugs are bad, m’kay. Then even if you did teach that idea in school, you’d still have those who just ignore what’s best for them and make bad decisions.
I wonder about the idea that payday loan companies have the right to make money, too - they can make money at, say, 50% interest (at a guess - you could certainly sit down and calculate at what level of interest the risk becomes profitable); I’m pretty sure it doesn’t have to be 800% to still be profitable. 800% is just taking advantage because no one is stopping them. But then we’re back to the start again - no one is forcing people into payday loan offices.
I’m torn on this as well.
A guy my husband works with bought a mortgage from a door to door salesman and as one would expect, because he didn’t understand everything, completely financially screwed himself and his family over.
I feel sorry for him and I want to kick these predators in the nads.
Sometimes what’s a horrible drain on someone who doesn’t know better or can’t do better is great for someone else.
Poor people living in motels/hotels and being unable to save enough to put money down so they can rent an apartment: bad. People choosing to live in motels/hotels because they want to have someone else do the cleaning: half my coworkers. People spending a few days in a motel/hotel while looking for an apartment: BTDT.
Furnishing your apartment with rentals longterm? Expensive as heck, absurd both from a financial point of view and if you have any taste (the selections tend to be very limited). Renting a bed for the first month, getting one of my own on the second? Did that, got me through a cashflow hump just fine. Rent-to-buy? That’s normally used by people who don’t know about other choices, do not have them available, or can’t think of other strategies. I know several people, myself included, who have furnished flats slowly, but that seems to confuse most of our acquaintances; the idea of “I’m buying one piece of furniture/set each month instead of getting everything from day one” makes their brains hurt. I don’t think I’ve ever seen it mentioned in a magazine either.
Do I feel sorry for the people the sharks are feeding on? Depends. For the ones who never learned better, or who know better but can’t, yes; I’ve helped a few of them come up with better solutions for their needs. For the ones who make the choice, no - why should I? It would make as much sense as being sorry for someone whose home-decorating taste doesn’t match mine.