Being poor in America is a full time job. The movements of poor Americans are often longer than those of middle-class Americans. Buy cheaper, low-quality products – say, a pair of inexpensive boots with cardboard soles – often results in more money spent over time than a slightly more expensive and better quality item. And all those who have read Linda Tirado’s controversy “Hand to mouth: living in Bootstrap America“knows that this country is literally rigged against the poor.
No industry is more emblematic of the systemic oppression of low-income Americans than payday loans. Some 12 million Americans take out payday loans each year, and these loans incur fees of $ 9 billion per year. That’s a staggering number, and once you know a little more about the system, it’s easy to see how predatory payday lenders can rack up these huge profits. It turns out that banking being poor is big business in America.
Suppose you need a loan to go with you until the end of the month – your workplace is closed for a week due to flooding, maybe, and you don’t have enough money to pay your rent. (You certainly wouldn’t be alone; a 2012 survey found that 69% of all early payday loans were used to pay recurring bills.) So you take out a payday loan to satisfy your landlord, by providing the lender with a backdated check or access to your bank account. Even if you do exactly what you are supposed to do and pay off the loan within the prescribed period of two weeks, you will have paid an incredible amount. 391% interest on the loan during this period – the national average interest rate for payday lenders.
What if you, like 80% of all payday loan recipients, are unable to repay the loan within this two week window, your interest rate 521% rockets, and quickly escalates from there. One-fifth of all payday loan recipients find themselves in default and with their credit scores destroyed, effectively barring them from getting loans for the next seven years of their lives, with the exception of, you guessed it, predatory lenders, who will continue to take them out. overcharging at all times. The average American family earning $ 25,000 a year spends almost 10% of that income on financial transactions – literally more than they spend on food in a year.
This profit is a feature, not a bug, of the payday loan industry. This is literally the way the system is designed to work – to take advantage of people who have no financial options or backup plans. Meanwhile, the rest of us, one or two down the economic ladder, enjoy 8-35% interest rates on our credit cards and personal loans. This system exploits people who are already economically vulnerable: people without a college degree, renters, youth, Americans with disabilities, and African Americans.
In this week’s episode of “Fork economy“Nick Hanauer and Stephanie Ervin interview two payday loan experts who are helping break free from this vicious cycle of payday lending.
Mehrsa Baradaran is a professor at UC Irvine whose recent books are titled “How do the other half-banksAnd “The Color of Money: Black Banks and the Racial Wealth Gap.” She is a supporter of transformation American post offices in public banking centers offering affordable and inclusive financial services – including savings accounts and small loans. It may sound like a big and bold policy, but Postal Banking helped the United States recover from the Great Depression, and it is still in practice in countries with high living standards around the world.
While thinkers like Baradaran dream of creating an alternative system that includes everyone in our economy, others are making great strides in fixing the current system. Cate Blackford co-chaired the campaign for Colorado Proposition 111, a 2018 state vote initiative that reduced the annual interest rate on payday loans to 36% per annum and eliminated other fees and charges that soak the poor.
Blackford’s success with Prop 111 goes against the common perception of the payday loan industry as a necessary evil, or an untouchable colossus. It is true that payday loan reform bills are dead in states across the country, including my house of Washington state. These high profit margins allow predatory lenders to buy the best lobbying firms money can buy, after all.
But the truth is, Americans know a scam when they see one, and once people understand how payday loans scam the poorest Americans, they stand up and fight. Prop 111, for example, exceeded by an overwhelming 77% of the vote in Colorado. When nearly eight in ten voters join hands across party lines and take a unified stance, you know you’re on the right side of history.