As I recall, it was a Thursday and I needed to eat. While gainfully employed in a student job, my check wasn’t due for another week or two. I had nothing in my bank account. The slate clouds threatened that cool, morning drizzle northern California is known for.
After a night of debauchery, I was unsteady. In my book bag was a high-end personal CD player, a gift from my parents. Before me was a shop window backed by metal bars. Above the doorway was that ancient symbol: three golden balls. I screwed up my nerve and entered.
I walked out with a pair of twenty dollar bills in my pocket. Far less than I’d hoped. This had to last me. You know how the story ends: By Sunday, I had not much more than lint in my pocket and was digging for some other funding source. I honestly don’t remember how I made it until my paycheck. But I did; here I am, my financial ship basically righted.
Thank God I had not met a “payday loan” operation. They did not yet exist.
Here’s how a payday loan operation works. Say I need $200, but payday is nine days away. I go to a payday loan outfit, and if I can prove I have a job by showing a pay stub, they will give me the two C’s in return for a check post-dated two weeks from now, for $230. Between now and then, I need to pay off the loan at $230, or they cash the check. No money in my account? In some states, no worries: I can “flip” the loan, buying another two weeks for another $30. (In some states this is illegal.)
That adds up to about a 390% annual interest rate on the loan.
Most folks pay back the money. Indeed, payday loan operations serve in many ways as a de facto banking system for the poor. That’s how they bill themselves, helping working Americans just make ends meet and handle unforeseen emergencies.
But, of course, that’s not where they make their money. They rake in the dough from poor saps like I was, in that pawn shop: desperate, feeling out of options. People in that state will often do anything. Indeed, I can bet that, had there been a payday loan shop available, I would have jumped inside in a shot. And two weeks later, I would have been hoping to flip that loan.
Payday loan companies comprise a $28 billion industry in terms of loan volume — roughly comparable to the gross domestic product of Jordan. They make their money the same way loan sharks do, by squeezing people who don’t pay their debts on time.
Lots of people get taken in, driven by desperation. The problem was big enough that the defense department pushed for a law capping the interest rate payday lenders can charge. The Pentagon said that service members were paying, on average, $827 on a $339 loan.
On October 1, payday lenders won’t be able to charge more than 36% to service members. They are getting out of that business, saying that rate of return just doesn’t make them enough to justify the work.
Other places are trying to do away with these loan sharks, too. Washington, DC just voted to cap rates at the 48 payday shops in that city. Georgia banned them in 2004. Word is that Ohio may be next on the agenda.
Some see this as a liberal-vs.-conservative issue. Those bleeding hearts are out to coddle the poor. But to me, it’s a moral issue that has nothing to do with that. We’ve already agreed, as a society, that it’s wrong. Since Old Testament times, people have agreed it is wrong to charge exorbitant interest. And here on American shores, there were interest rate caps between four and seven percent in the colonies of the New World. Loan sharks, who charge in the neighborhood of 125% interest, are prosecuted under RICO laws.
And, there are other, far less exploitive, options for people who really just need a bit extra to cover an emergency, from bona fide advances from their employer to working out payment plans with legitimate creditors.
No, it’s not that pawnshop’s fault I had burned through all my money back in college; it was my own. We all have a responsibility to live within our means.
But we also have a responsibility not to prey on the weak. An industry that can only survive on poor decisions made in desperation doesn’t deserve a place in our colonies.