LIBERADIO(!)

A recently unlocked 2009 article from Harper’s tells the story of the predatory lending practices of “payday loans” and the place that birthed them – Cleveland, Tennessee.

In light of 4 bills coming before the Tennessee General Assembly next week, this is a must-read article:

An applicant need only fill out the sheet, show proof of employment and a bank account, and then write a bad check, dated her next payday, for the loan amount plus the fee. (In Tennessee, typical advances range from $50 in cash for a $58.82 check, to $200 for a $230 check.) On that next payday, the customer cashes her paycheck and buys back the check in cash for its face value.

Such is the process in principle, but seldom does it work out that way. When the next payday arrives, most borrowers can’t afford to repay, so they extend the loan until the following payday by paying another finance charge. …Like a sharecropping contract, a payday loan essentially becomes a lien against your life, entitling the creditor to a share of your future earnings indefinitely. Even the industry- sponsored research cited on the Check Into Cash website shows that only 25.1 percent of customers use their loans as intended, paying each one off at the end of their next pay period for an entire year. …This is hardly surprising, of course: if your finances are so busted that a doctor visit or car repair puts you in the red, chances are slim that you’ll be able to pay back an entire loan plus interest a few days after taking it out….

Once caught in the cycle, the borrower faces a choice each payday—pay Check Into Cash $30 or pay Check Into Cash $230. Unlike conventional loans, in which the creditor issues the debtor a lump sum to be repaid with interest in installments over time, the largest single transfer in a payday loan goes from debtor to creditor. With payday lending, the “debt trap” is not a figure of speech: the loan is actually structured as a trap.

And the predatory lending trap goes on for months and months or until the borrower can afford to pay back the full amount. If it goes on for a year and the borrower receives a paycheck every two week, that’s $30 x 26, or $780.00.

The profit margins are similar to those in conventional banking, but as with fast food, payday lending derives those profits from innumerable small-value transactions taking place at thousands of outlets. The business works according to the classic logic of deregulation. Profits on loans of a few hundred dollars can be significant only in a regulatory environment in which anything goes. If customers weren’t trapped – if they really paid off their $20 or $30 finance fees at the end of one pay period – payday lending wouldn’t be profitable at all.

Right now, a “payday” lending transaction yields 391% interest per year and a “title” lending transaction yields 264%. The so far unchallenged argument against capping the interest at a rate that is even a little more reasonable is that the payday and title lending companies are having a hard time making ends meet. The Harper’s article contradicts this argument and sets the state for some pointed follow up questions from the legislators set to hear the bills next week.