Payday loans are in the news, again. Fortunately, for the right reason this time as the US government is finally trying to crack down on them.
Not soon enough. Payday lenders are the resident evil of the financial industry – or, as the New York Times calls them “peddlers of ruin” (PORs).
A friend of mine once took a payday loan. It took her five years to pay it off. Miss a single payment or can’t pay off your loan in full, on time, all the fee fun (for the lenders) begins.
Let’s be clear. Payday loans respond to a tremendous need, but demand does not justify usury. Pretty much everyone is on board with this (except the lenders). But is everyone on board with fees and rates that can top 1000%?
Didn’t think so. But why is this horrid weed allowed to flourish?
Because the majority of payday loan clients are low income, most living on minimum wage paychecks. And who cares about them?
Low income folks need credit just like all the rest of us. But unlike higher wage earners, an unexpected $250 hospital bill when your son breaks his arm can be financially devastating. You will need a loan and fast. But how do you pay a loan due next pay day if it costs more than your $300 a week paycheck? Use candles, walk 20 miles to work, cut off the gas, don’t eat, what? In the end, over 85% of folks pay many time more in fees than they do in interest.
POR lenders will tell you rates and fees are necessary for credit risk management. Nonsense. It’s about pillage and plunder straight up. If a small credit union in Kenya can charge farmers with less than an acre of land 34% for a $250 loan repaid over a year and still be profitable, why can’t PORs? Because they make too much money and don’t care about people. This is not just bad for borrowers, its terrible for the economy as well. See John Oliver’s excellent review for why this is so.
The proposed legislation will impede PORs but it won’t stop them from doing harm. Put ‘em out of business I say, let credit unions, local banks and responsible financial institutions do a better job. The means we can import from Kenya, the will has to come from here.