I'll cover some of our disagreements in a minute, but I think this is really interesting:
McArdle is far too generous to the lenders here. For one thing, I made it clear in my post that credit cards are very good for transactional credit: if you need to pay the car-repair shop today, using a credit card is a great way of doing so. But you should also have a good enough relationship with your bank that by the time the credit-card bill comes due, you can pay it with the proceeds from a personal loan or line of credit.
Secondly, I don't think for a minute that we should deny the poor credit; in fact I'm on the board of a non-profit institution which exists to provide credit to the poor, and I'm all in favor of that. It's credit cards I don't like, with their high fees and interest rates (and there are even exceptions to that rule, such as the ones provided by many credit unions). And I really dislike payday loans, which are pretty much universally predatory, especially when compared to similar products from community development credit unions.
Megan's conceptual mistake here is clear when she says that "credit extended to the poor carries high interest rates to cover the default risk". But in fact the interest rates on credit cards are really not a function of default risk at all. Mike Konczal had a great post on this back in May, where he showed pretty conclusively that credit-card interest rates were all about maximizing profit for the issuer, rather than compensating for default rates. And payday loans are even worse.
What earthly grounds does Megan have for saying that the number of people made worse off by payday loans is smaller than the number of people made better off by them? I suspect she considers the alternative to be no-credit-at-all-nohow-noway. But that's not what anybody is proposing. I, for one, think that credit should be available to the poor, very much so. But not in the quantities and at the rates that it's been available until now. There is such a thing as too much credit, and we crossed that line long, long ago.
It's an odd fact that poor people shun bank accounts at an astonishingly high rate. Rather than pay $10.00 a month for a checking account, they'll pay more than that to a check cashing place. Of course, it's not like banks are going after those clients, because they're not very profitable--small accounts still have almost all the transaction costs and overhead of large ones. But why don't the customers go after the banks?
The plausible reasons I've heard:
- Check cashing places give you the money immediately
- Poor people are disproportionately subject to judgments and garnishments that make it preferable to operate in cash
- People working off the books don't want a trail for the IRS to follow
- For people with low incomes, the costs associated with a mistake--bounced check fees, for example--can be devastating. But if you don't have the fees, people will overdraw their accounts.
- Check cashers keep longer attractive hours and have better service
The problem of payday lenders and credit cards, however, is not a problem of the unbanked. If you don't have a relationship with a bank, you almost certainly do not have a credit card, and you definitely aren't using a payday lender.
So why are people using credit cards and payday lenders?
Credit cards have low transaction costs, which is why, as Felix argues, people use them for sudden emergencies. Many of them would be better off if they did go to their credit union for a personal loan to pay off the balance. On the other hand, if you're planning to pay off the balance in a couple of months, that's overkill--and the loan inquiry will ding your credit.
Payday loans are a different question. There's a lot of literature on them, but most of it agrees on a few points. For our purposes, the salient characteristics of payday borrowers are a) they have little-to-no money in the bank b) they have moderate incomes and c) they are fairly severely credit constrained. Virtually all payday borrowers use some other sort of credit (Stegman and Faris, 2003). At least 60% of them have access to a credit card (Lawrence and Elliehausen, 2008). 73% of them have been turned down for a loan in the past five years, or received less credit than they asked for. If they're turning to payday loans, it's because they have maxed out those other forms of credit, and they have some pressing cash flow need.
Payday borrowers do not necessarily turn to payday lending out of ignorance; a majority of them seem to be aware that this is a very, very expensive form of financing. They just have no better options.
The biggest problem with payday loans is not the one-time fee, though that is steep; it's that people can get trapped in a cycle of rolling them over. Paying $15 to borrow a few hundred bucks in an emergency is bad, but it's probably manageable for most people. Unfortunately, since payday borrowers are credit constrained, have little savings, and are low-to-moderate income, they often have difficulty coming up with the principal when the loan is due to pay off. The finance charges add up, making it difficult to repay the loan.
According to Lawrence and Ellihausen, about 40% of payday borrowers fall into that problem category: they have rolled over a loan five or more times in the past year. A hard core of about 20% had rolled over 9 or more advances.
Judging who is worse off is a pretty tricky task. Would payday borrowers be better off if they had no other debt, and could go to their credit union for a tidy personal loan? That's unquestionable. By the time they're at the payday loan stage, however, that doesn't seem as if it's usually an option. I'd say that the people who are rolling over 9 or more loans are definitely worse off, the people rolling over 5-9 loans are probably worse off, and the majority who are rolling their loans over no, or a few times are probably better off, given the circumstances they were in when the time came to get the loan. People who roll over loans only a few times are not trapped in a debt cycle, and (I'd guess) are unlikely to have been using the loans for ordinary expenses.
There's some experimental and empirical evidence to support this. Wilson, et al (2008) built an experimental model of credit-and-cash constrained households, and found that adding payday loans contributed significantly to household financial survival in the lab. Which seems to also be true in real life, according to their paper:
Georgia banned payday loans in May 2004 while North Carolina banned them in December 2005. These two events provide the authors with an opportunity to empirically investigate several effects of the removal of payday loans on household behavior. Morgan and Strain find that relative to households in other states, households in Georgia bounced more checks, complained more frequently to the Federal Trade Commission about lenders and debt collectors, and were more likely to file for bankruptcy under Chapter 7 after the ban of payday loans . . . The results for North Carolina, which the authors regard as preliminary, given the shorter period in which payday loans have been banned, are similar to those for Georgia.
But as Bart Wilson told me the last time I saw him, they also found a minority were made much worse off by the loans. Those were the people who took out ten or more--and just as Lawrence and Elliehausen found in the real world, those extreme borrowers made up about 20% of the group.
There is, of course, the question of what happens to people between the time when they had no debt, and the time when they need the payday loan. If we could constrain them during that period from maxing out their available credit, they'd never need a payday loan. People who have maxed out their credit and are getting turned down for loans could probably have used an intervention that would force them to match income to outflow.
But I'm not sure how you do that. Say we slap on a usury law that makes credit card lending to poor people unprofitable, so people use personal finance loans instead. Well, the people who are getting payday loans now would, in this alternative universe, have already maxed out this line of credit. How do we know that? Because they seem to have done it in this universe. I don't know whether that's because they're irresponsible, or because they had a string of really crappy bad luck. I'm not sure it matters.
The core problems we would actually need to solve to get rid of payday loans are first, that some people have marginal incomes and no capital, and second, that when credit is available, some of those people do not exercise the incredibly tight spending discipline which is required to achieve financial stability on such an income. Because their incomes are marginal, and the lives of the working poor are fraught with all sorts of extra problems, like cheap cars that break down constantly and landlords who turn the heat off, the people who do not keep very tight control of their money are fairly likely to end up in a place where they have exhausted all other credit lines, and are forced to pawn something, hock their car title, or take out a payday loan.
And those loans are jaw-droppingly expensive. Even non-profit payday lenders apparently charge about a 250% APR, because the loans have a 10-20% default rate, and the transaction costs on lending small amounts are very high. Of course, the profits are usually quite substantial, with APRs often double the non-profit rate . . . and even I have to wonder how a guy who made his fortune lending money at 600% o society's most financially unstable people, smiles at himself in the mirror every morning.
In principle, I agree that many poor people would be better off if they were able to borrow a lot less money at better rates (though even then, I always wonder if I'm not just imposing my monetary time preference on others). Only when I look at any given rule aimed at accomplishing this, it always hurts a lot of people, even as it helps others--I think the last twelve months have proven fairly conclusively that the supply and price of credit are not entirely unrelated to default risk. While it is absolutely true that credit card issuers maximize their returns through hefty stealth charges, and payday lenders charge absolutely rapacious interest rates, it is also apparently true that these awful loans often help avoid even worse fates. And I don't see any way to cut off the credit to people who are ignorantly or irresponsibly getting into trouble, without also cutting it off to a bunch of people who need it.
So I think focusing on the lender side is usually a mistake, though I can't say I'd be sorry to see caps on what payday lenders can charge. The lender side makes us indignant, because hey, they're getting rich by charging outrageous rates to those least able to pay them! But if we want to actually improve the lives of the borrowers, we need to intervene before they get to the payday loan point, rather than try to stop them from getting one once they're there. Felix is doing God's work on just that problem, as are many other people in many other ways. I think we'll be better off when payday lenders go out of business due to lack of demand, not prohibited supply.
There was an NYT Mag article about a big payday loan company based in California that was purchased by a regional bank, which kept on the founder/CEO of the payday lender, because he had proven so adept at doing business in low income areas. The article went into a number of reasons why the payday lender's clients used it, ranging from the transparency of its fees, to little things like the shops' concrete floors, which made guys in dirty work boots feel comfortable going there. The payday lender CEO also pointed out that if you annualize things like bounced check fees that traditional banks charge, those interest rates are often higher than payday lenders'.
Payday lenders serve a legitimate purpose. If we regulate them out of business (by either capping their fees to something "reasonable" or by outlawing them), what are people needing payday loans going to do? The next best legal alternative is the local pawn shop. Pawn brokers charge fees that are every bit as "outrageous" as those charged by payday lenders. Are we going to put them out of business, too? What's next, prohibiting people from selling their property on eBay?
Point being, if you are desperate for cash and are not credit worthy, you either go to a payday lender (who charges a rate that implicitly assumes a high percentage of borrowers will default), pawn something, visit the neighborhood loan shark, or steal. Why is foreclosing the legal but distasteful thought to be good public policy?
General Rule 1: there's no such thing as a non-profit. Someone is always profiting, even if it is just by bringing home a paycheck. Often there's a big rent-seeker behind the facade of good intentions.
Corollary: Watch out for the useful idiots in a non-profit. The true believers are immune to facts and logic.
General Rule 2: Automatically discount any arguments insinuating that "maximizing profit" is a bad thing. That's usually a smokescreen for a lurking flaw in the argument.
If Mr. Salmon is thinks there's such insane profits to be made on credit cards, he's free to start his own. It's do-able -- Discover made some inroads and arguably had a shot at dethroning the big boys despite their 'network effect' advantage.
I take some exception to general rule #1, although to be fair non-profit is a word/concept that could stand to be retired since it's seldom understood. Non-profit doesn't automatically equal charity. Credit unions for instance are non-profit businesses but that certainly doesn't mean that nobody is benefiting. The employees get jobs, the members get financial services at competitive rates, and the government gets tax revenue from payroll and property taxes. The exist exactly to benefit their members and employees. To paraphrase Gordon Gecko, it's a crappy deal if nobody benefits.
The reality is, a 250% APR is often the least of evils when you're really poor.
I think an over-reliance on payday loans stems mostly from time horizon problems. Mike Gray's book Drug Crazy has fascinating look at addiction and how drug prohibition destroys addicts' ability to plan, and people with similar problems are certainly overrepresented among the chronically poor.
I like how people treat Poor people like some weird long lost tribe that we can't communicate with. If you want to know why poor people don't use banks, why don't you ask them? From my experiences there are several reasons the don't:
A. There generally aren't a lot of banks (if any) in poorer neighborhoods. There is also generally a lack of free, bank-owned ATMs in poorer areas.
B. As Megan mentioned, Bank fees are usually a flat rates that have a larger marginal effect on poorer customers. Also, most banks have no problem "lending" customers a small sum of money at a very high interest rate, which is effectively what overdraft fees are. Most poor people would probably prefer to have a transaction denied than to get a $30 fee for a $5 purchase.
C. There is a lot of historical mistrust with poorer communities and banks. If banks have a history of not treating middle-class minorities fairly, why would they treat the poor any better?
D. For the same reason Paulites stick all their money into "Pure Strain Gold", an inherent distrust of "elitist" institutions like banks.
E. What level of customer service do you think the average poor person would receive from a traditional bank? The banks are well aware that these customers have little cash (which is what banks really want) so they need to make their profit on fees. Keeping their poorer customers less-educated actually increases their bottom line. They are never even going to receive the level of service that someone looking for a mortgage or saving for retirement would get. At a Check Cashing place, they are the main customer base. They will probably be a little more effort to secure their business (or at least a basic attempt not to humiliate them).
We live in a debt-based society and the poor start off in much worse shape because that initial amount of capital is always going to be much more expensive if you are poor. Add the fact that initial credit-worthiness is often determined by family (and the co-signers you can secure) and you can see that our current financial system can be a significant barrier for poor people.
Megan's conceptual mistake: "credit extended to the poor
carries high interest rates to cover the default risk".
But in fact the interest rates on credit cards are really
not a function of default risk at all.
Mike Konczal had a great post on this back in May, where
he showed pretty conclusively that credit-card interest
rates were all about maximizing profit for the issuer,
rather than compensating for default rates. And payday
loans are even worse.
Imagine my surprise: Usury lives !
Perhaps POTUS might bow, and politely request that the
Credit Card Companies reduce the vigorish, until the
economy improves, in the public interest of avoiding a
massive wave of simultaneous defaults during parlous
economic times.
While literally true, the distinction between "maximizing profit" and "compensating for default rates" is trivial at best. In practice, "maximizing profit" requires making a profit, which involves covering all costs -- including loan defaults. So, in setting rates to high risk borrowers, lenders take into account the actuarial estimate of the cost of defaults.
In a monopolistic situation, a lender might charge low risk borrowers rates that are far higher than what otherwise would be "market rates". However, lending to low risk borrowers is very competitive. Such borrowers have plenty of options and tend to shop around. This drives rates as low as possible for this class of borrowers. The same is NOT true for high risk borrowers. These borrowers have far fewer options and lenders are not under as much pressure to give rock bottom rates. Still, if some lender were to start making a ton of money lending to this segment of the market, other lenders would quickly enter the market (there are few barriers to entry) and would bid down rates -- but not below the amount needed cover expected defaults (at least not in the long term).
So, while the focus might be on maximizing profit, the default rate is hardly an immaterial consideration. It'd be like saying the costs of land, lumber, and labor have no bearing on the cost of new homes. Maybe not in the short-run, but in the long run those costs play a huge role in new home prices. Otherwise home builders would go broke selling below cost or other builders would bid away the extra profit.
I don't think its a particularly stunning revelation that credit card interest rates are set to maximise the profits of issuers. In any for-profit enterprise, prices will be set in this way. The question is whether or not credit card issuers make monopoly profits off credit card interest. The answer is that they do not, for otherwise, as a previous commenter mentioned, there would be a number of new entrants into the credit card interest hoping to undercut the incumbents and get a slice of the supernormal profits.
Here's a theme from some people I notice over and over again and I am get tired of...
Why can't be be more like me (and rules be crafted to make it so)
Why can't people eat like me ("")
Why can't people have morality like me ("")
Now I do it to on a couple of issues (although only in rare cases), but I really would be willing to give up my own personal, "why can'ts..." if everyone else is.
Not that I'd change what I do and the way I'd live my life, but it's a bit of a drag to consistently see everyone's personal way of living life attempted to be advanced for everyone else in society via public policy.
Not that I'd change what I do and the way I'd live my life, but it's a bit of a drag to consistently see everyone's personal way of living life attempted to be advanced for everyone else in society via public policy.
You have someone who's 28 years old making $24k a year working at a printing shop and due to his low income he sometimes needs to make use of a payday loan.
Now, you could argue that his choice to not finish high school, not get any vocational training, not save extra money, spend so much of weed, etc. are all poor choices on his part. Poor choices that he should have been legally prohibited from making.
Is it at all possible that his current lifestyle is the one most closely aligned with his preferences? Is it conceivable that not everyone aspires to be a sober, responsible, suburban colonial living, Honda Accord driving, middle manager?
"It's an odd fact that poor people shun bank accounts at an astonishingly high rate."
Megan,
It's only odd because you're so out of touch. When's the last time you walked into a bank and tried to cash a check?
No bank will cash a check unless you have an account in that bank and that account has funds sufficient to cover the amount of the check you try to cash in case it bounces.
Poor people are not stupid. They hate using check cashing services. They're forced to - because your friends the Democrats run our banking system and allow banks to refuse service to poor people. Your friend Barney Frank could force banks to cash checks, but he hasn't.
He's too busy looking for dope.
http://www.huffingtonpost.com/2009/11/07/barney-frank-was-present_n_349648.html
I'm no fan of Barney Frank and I think he is responsible for a lot that is wrong with the US financial system, but that is the first time I have seen him criticised for not forcing banks to give away money (presumably for free).
I don't think you understand what a check is. It is not legal tender. It is a private instrument of service in which John orders Nancy, who is presently holding John's assets, to tender a portion of those assets to Alan.
Once Alan has that instrument of service, the only people obligated to make good on it are John, owner of the assets, and Nancy, keeper of John's assets. Alan can't just go demand those funds from anybody. If Sue agrees to tender the funds to Alan and then go fetch them from Nancy later, she will most certainly charge him a fat fee to cover her overhead costs and fraud risk, or else insist that Alan have some sort of existing business relationship with her. And Nancy will almost certainly charge Sue a fee for the same reason.
It rather baffles me that you would suggest banks should be obligated to cash anyone's check at any time and place (and evidently socialize the overhead and fraud risk among the bank's legitimate customers). It sounds exactly like the sort of Obamaesque populism that you've been so freaked out about for the past few months.
Banks used to cash any check drawn on them (hence they could verify the presence of the funds) whether the payee had an account with them or not. I last did this back in 2001, and had to pay a $5 fee and provide ID and my thumb print. (I don't recall why I didn't just take the check to my own bank to cash). Anyone know if banks still do this?
They charge $10 now. Long story but a friend was worried his last paycheck was going to bounce, so he went to the bank that held his companies payroll account. They were willing to cash the check - for $10.
I can see why they need to do the license and thumb print to avoid "Catch Me If You Can" style frauds - but how they can get away not honoring checks drawn on accounts at their bank - that I can't understand.
"Banks used to cash any check drawn on them ..."
Banks used to BE REQUIRED to cash any check drawn on their accounts - required by the government to do so.
But then the Democrats and Barney Frank rewrote the rules - something that escaped Megan's notice. They no longer force banks to cash checks drawn on their own fucking accounts. Megan is unaware of this because Megan isn't poor and is out of touch with how Washington fucks over the real world.
These new rules force poor people to have to use high-priced check-cashing businesses - since banks are not required to cash checks on their own accounts.
Here's a question ... does Barney Frank then receive any campaign donations from payday loan or check-cashing types of businesses?
http://www.opensecrets.org
Don't be so fucking naive, Megan. Barney Frank is corrupt and helping these philistines extract this money from the poorest of the poor. It's unconscionable.
Man can you ever tell all the economist gnashing their teeth over payday here have never actually been working poor. My spouse and I had to work our way through college and we learned what it was like to not have any financial margin at all.
What the eggheads in this discussion do not understand is that for the working poor, time is the resource they most need to conserve. They don't use banks because banks take to much time for to little return. When they need extra money, they need it in very short time windows. Most banks can't process loans that quickly and even if they could, the working poor don't have the time fill out the paperwork. (I was particularly amused by the "personal line of credit" bit.) The working poor don't have the time to visit banks, the time to manage banking information nor the time to fix mistakes.
Banks don't save the poor any money because when you're talking about people living from paycheck to paycheck, one mistake with the checking account can set off a chain reaction of bounced checks that can cost you hundreds of dollars (that you don't have) and even land you in jail. It's worth spending an extra $25 bucks a month for check cashing services to avoid that kind of catastrophe.
Credit cards are dangerous for the poor because it's really hard to resist the temptation to use them when you don't need to when you're flat broke. Spending even a little bit of money on a treat feels a lot better when you're busted. It's a lot harder to resist ordering a pizza on the card after you've put in a 12 hour day on your feet. When you end the month with $5 dollars in the bank its hard to carry around $500 dollars of credit without using it.
The working poor use payday loans to conserve their time and their exposure to financial risk. When they need the loan, they need it right then and they need to get it without taking a day off from work. Payday loans keep people from being evicted, they let them fix their cars so they don't loose their job and any other critical expenses that will lead to a devastating financial reversal much, much worse than paying an extras $25 bucks for a loan.
The working poor need simple, robust and reliable financial services. They will gladly pay a premium to services with those attributes. People with healthy margins of both time and money can risk futzing over maximizing their interest rates because they don't have to worry that mistake or unanticipated event will get them evicted, fired or imprisoned.
People who pontificate about the mathematics of payday loans and other such services need to spend a couple of years living on the real edge. Until they do, they just vomiting ivory tower nonsense.
"Banks don't save the poor any money because when you're talking about people living from paycheck to paycheck, one mistake with the checking account can set off a chain reaction of bounced checks that can cost you hundreds of dollars (that you don't have) and even land you in jail."
Not only this, once you've had the string of bounced checks and you get overdraft fees that you can't pay--or at least that you can't pay immediately--your account is closed by the bank, you get reported to Chexsystems, and good luck getting any other bank to let you open a checking account after that, even if you would rather use one.
To add an anecdote: We have 50 union fitters and plumbers and we offer the option of direct deposit or paper checks. DD is processed and deposited into their accts on Tuesday at midnight. Most prefer paper checks on Friday because few have bank accounts. Those with bank accounts and prefer paper checks are, in every case, older and prefer it "the old-fashioned way".
*Noted from casual conversations about intentions during the time they fill out employment paperwork with me when they start.
How refreshing to hear from someone who has actually been there. Even those with good intentions generally miss the point when they try to understand what it's like to be poor from the outside.
Your comment about time is really insightful. The time it takes to processes transactions as well as the time it takes to correct mistakes are critical factors in the poor's utilization of financial services. To meet bank's demands in securing a loan, I'd have to miss some work in order to have the time to meet with the loan officer, which I can't afford to do. This same problem arises when it comes to detecting and correcting banking errors. Banks make mistakes, but they don't believe that they do. It often takes several hours of face to face contact to prove that a bank error has occured and get it corrected - hours that fall during the work day. I've had personal experience with a bank that made errors on my account that caused a series of checks to bounce. This effectively left me penniless for about 2 weeks. When we did finally get the bank to correct the problem, we still had to pay the returned check fees to the vendors and even some to the bank. We probably had legal options, but I don't have the time or money to retain counsel, so...And, the bank is not in the least concerned about losing my business, so I have absolutely no leverage in dealing with them - and I've been an account holder at the same institution for 10 years!
Another factor related to time that drives poor people to payday loans is that while I make enough to (barely) cover my monthly expenses, I don't make it all at once. The fact is payday loans are there to make up the time difference between when you need the money and when you will have the money. When I have electric and water bills both due and money to cover only one of them, what else is there to do?
Toss in an unexpected car repair, and your hooked. I turned to a payday loan 6 months ago because I had a $600 auto repair bill and two weeks to pay it - or the guy was threatening to sell it from under me! Again, legal options, but no time or money to pursue them. The payday loan gave the the ability to get my car back from this swindler, but now I'm on the hook for 300 bucks I don't have. So I roll it over until income taxes come in and I have the cash to pay it off.
The real world is not so simple when you don't have any cushion to fall on. We don't make these choices because they are appealing, but because they are necessary. If there were better options available, we are not so ignorant that we would not pursue them. But if you've got a pitch, make it quick because we're on the way to work.
thank goodness we have people like Felix around to save people from themselves
After reading Felix's post I clicked through to Felix's Poor People's Credit Union, and I recommend others do so as well. You can compare rates on the personal lines of credit Felix favors (starting at 10%) and the credit cards they offer (rates start at 9%). It looks to me like Felix is pushing the more expensive product. Here's a hint: people don't use personal loans for these expenditures because...personal loans are more expensive!
The rest of his post is the usual liberal schtick--I favor the intended good effects of the policy and don't favor the unintended ill effects. So Felix can say he favors providing credit to the poor, we shouldn't deny them credit. It's just, he says, that they've had too much credit and at the wrong rates. (Given his position on personal loans, it isn't clear if he thinks the rates are too low or too high.) So he really favors giving the poor credit, except less, which is to say, they should get all the credit they need, but only the credit they need. It's just fantastical.
The real tragedy here is that the term "hella" has finally made it to the east coast.
Agreed! I haven't thought about that word since moving back east in 2000.
That term's been here for years. I first heard it in 2000 when I moved back here from Utah.
The answer to the payday loan problem is to make every day a payday. If everyone was paid in full at the end of each day; then there would be no asset basis for payday loans. Why should employers hold onto money that their employees have already earned? In the distant past, salaries were sometimes paid semi-annually or even annually due to primitive banking technology. Modern banking systems are easily capable of posting daily salary updates. If some people preferred to receive their pay at longer intervals; then their banks would be overjoyed to have the use of their pay and distribute it at any interval an individual might prefer. Daily pay would also eliminate the issue that arises when companies fail still owing unpaid wages to their employees.
the problem with this for many businesses, particularly small businesses, is that they themselves are already using loans to make payroll. One could argue that they could make that payroll loan based on _projected_ expenditures/employee numbers, hours, etc, rather than recorded, and so have the cash-on-hand (or on the books) to pay daily compensation, but it is still an accounting nightmare from the side of the business, if not the banking system.
Megan,
That's quite a post. Instead of tackling the whole thing, I want to focus on one key question you pose: why do the poor turn to payday lenders?
There's a very simply answer that you don't offer - geography. Payday lenders go out of their way to open storefronts in low-income neighborhoods. Banks don't.
It's incredible how strongly determinative a role spatial geography plays in financial decisions. There've been a series of compelling investigations and academic studies that have examined the locations of subprime lenders. Overwhelmingly, they were located in comparatively poor areas. As they got snapped up by national financial institutions, and converted into affiliates, banks continued to place branches of their primary brands in affluent districts, and to put only subprime affiliates in poorer neighborhoods. There's a tragically large segment of subprime borrowers, including many who have entered foreclosure, who would have qualified under ordinary lending guidelines for prime-rate mortgages. They weren't offered those mortgages, because they walked into their local lending office to talk to a loan officer or mortgage broker. Had they driven a mile to a nicer part of town, and walked into a branch operated by the same parent company, they would have been offered a regular loan - and probably could have kept their houses.
The same is true of payday lenders. And they're ubiquitous. To quote the NYT article to which you link, "Payday loan stores, which barely existed 15 years ago, now outnumber most fast-food franchises." What the study you cite - about Georgia and NC - actually demonstrates is that simply banning payday lending isn't enough, unless it's paired with a sustained effort to offer alternatives. Take away all the payday lenders, and the big national banks still don't move into these underserved markets. Borrowers under extreme financial pressure may not have good access to transportation, and are certainly unlikely to have either the financial sophistication or the time and tools to locate a decent deal. If the loan shark on the corner gets banned from the market, their needs to be a Co-op or a Credit Union that moves in to replace it.
Markets aren't always efficient. It's entirely possible to profitably offer short term, non-usurious personal loans to people in financial distress, and to make a small profit doing it. Numerous local institutions do just that. But since they're almost always small, often operated on a non-profit basis, and tied to local communities, they tend to lack the resources or the inclination to expand aggressively. Certainly, as long as extreme payday lending remains legal, such institutions won't be able to compete effectively. They're all looking for the same consumers, who have little information about financial services, and the payday lenders will be able to operate many more locations and to swamp non-profits and local lenders with advertising that they can't afford to match. It's very difficult to make a rational choice between the option you know, and the one you haven't heard about.
Good government programs respond to market failures. In this case, the government needs a two-pronged approach: a phased ban on payday lending, to allow time for alternatives to take root, and a series of incentives to attract capital to low-cost, short-term lending. If Credit Unions were as numerous as fast food joints, most of the payday loan problem would disappear overnight.
Your reason why payday lenders proliferate instead of credit unions is highly unlikely. Real estate in distressed areas is relatively cheap, so all a credit union would have to do is buy a storefront near a payday lender and put up a big sign that says "Our prices are 50% less than their's". Then all that advertising they do would be driving business to the credit union.
Unless big corporations do not like making money from poor people, I think the more likely reason these communities are underserved by financial institutions is that payday lenders have a competitive advantage.
Another possible approach is to improve competition among payday lenders. If payday lenders were located closer together and low income borrowers had real choices among them, prices would drop. I'm not sure how to go about tinkering with lenders' location decisions--zoning? tax incentives?
I am confident that outlawing payday lenders will eliminate the practice of exorbitant-rate short-term loans. After all, outlawing the sale of selected drugs certainly deterred the suppliers of that commodity. Right?
Yes. It did deter them.
Did it eliminate them? Of course not. But it certainly deterred them; and gave us a legal mechanism to extract justice from those we caught doing it.
Thanks for making this excellent point about why usury should be re-outlawed.
So basically you support poor people being force into illegal activities to borrow money? They'll sure learn their lesson about borrowing more than they can afford when the loan shark comes to "collect" on the bad debt.
Bang - Cynic gets it. Props to shannonlove for good insight.
One upon a time, TheRaven was working poor but working hard, all the way through college. TheRaven now lives where pay day lenders are lightly regulated and - exactly as Cynic describes - cluster up around lower income people. TheRaven sees this every day.
TheRaven wonders why Megan didn't fully connect the dots here: geography; lower income; immigrants; undocumented; untaxed incomes. It all adds up when you see signs advertising free money wires in pay day lender windows. The signs are in Spanish. Megan, have you ever actually seen a pay day lender? I suspect there aren't any where you live.
Bottom line: America's broken, inhumane immigration laws combined with our previously robust economy were like agar to the pay day pathogen. Seeking the destruction of pay day lending isn't a liberal stance when you consider the toxic effect such predators have on a free market consumer society. Seeking justice is non-partisan. As for why 'poor people' are adverse to banks, TheRaven asks when anyone outside of the southwest or Miami saw a bank run by Spanish-speaking people.
Megan, your control group for assessing poor people's participation in mainstream banking are recent immigrants living in Miami. In no other American city has Spanish become so predominant. TheRaven thinks that comparison of that group to, for example, poor Spanish speaking people around Nashville (where banks are run by white people) would reveal distinct differences.
As for why 'poor people' are adverse to banks, TheRaven asks when anyone outside of the southwest or Miami saw a bank run by Spanish-speaking people.
http://www.bancopopular.com/us/personal/us-per-home-en.jsp
"TheRaven wonders why Megan didn't fully connect the dots here ..."
Megan is out of touch. That's why she (and most other accountants) cannot connect the easily connected dots.
She didn't even have a detailed home budget until recently. I mean, is there any proof that Megan is educated enough to be able to connect dots in the first place?
Because there is a ton of recent evidence to suggest she's a garden-variety simpleton.
Actually, my bank branch (Virginia suburb of DC) has a predominantly Latino client base and lots of people on staff who speak Spanish. That refers to the people who go to the bank and wait in line. They look blue collar, they mostly go on Friday... everything you would expect.
The middle class people who use this bank have direct deposit and online bill pay arrangements, and pay lower fees as a result. We go into the bank itself once every two or three months and feel out of place when we do.
Actually banking in a real bank is getting rarer, and I expect that bank branches will get rarer as a result. So it's not just an account that would help the working poor get the best deals. It's electronic access to that account. Honestly, I doubt that I receive more than 6 physical checks a year. And I'm down to writing three a month.
Virginia suburb of DC
Manassas, Herndon, or Woodbridge?
It's electronic access to that account.
Universal Broadband is about as likely to get past the Republicans and Blue Dog Democrats as the Public Option in Health Insurance Reform is.
Dial-up works fine for banking. Direct deposit and ATM use also eliminate a lot of waiting in line.
None of the above regarding location. I won't give it away other than to say it's still within the area served by Metrorail. Lots of Latino neighborhoods within that range.
Amusingly, the kiosk ad I saw for Western Union in a post office in Spain was entirely in Romanian.
Megan says: "As Felix could no doubt attest at great length, this problem has proven hella stubborn."
It is always and forever amusing to me how people who are in favor of more immigration, always & forever, because they just know it's a good thing will edit immigration totally out of their consciousness when they are confronting a problem indisputably made worse by immigration.
The NY Times article Megan linked to about the low rates of bank use among the poor explicitly states that a huge part of the problem is recent immigrants who do not trust the banking system. These folk are also poor. So when Megan complains that we've been fighting this problem of the poor not taking to banking for years with little to show for it, the obvious (even to the NY Times!!) answer is that the people who are still not trusting banks are not the same people as the poor in prior years who didn't use banks!
Even if you are making tremendous progress on improving the lives and financial habits of poor people, if you are simultaneously importing a great whopping number of poor people with bad financial habits you will be making no progress. But to folk who take it almost as a religious precept that immigration is always and forever a positive thing that only racists could ever question, the fact that you can be trying forever to improve the lot of the poor and yet appear to make no progress seems like the weirdest sort of paradox.
Ah, blindspots.
But hold on, these new immigrants are mostly coming from poor couuntries, and they appear to be doing better in the USA on average, judging from that on average remittances are sent out of the USA to poor South American countries.
So if your story is right:
1. The non-recent immigrants are better off as they have moved to using banks.
2. The recent immigrants are better off than they were before they immigrated even though they don't use banks.
Now Megan may well have missed this argument, it may be the equivalent of complaining that we spend billions on education and still every year another bunch of kids show up for school on their first day without being able to read. But your argument hardly implies that immigration indisputedly makes the problem worse, unless you care more about reducing percentages of non-banking rather than the question of whether people are better off overall.
You may, indeed, be correct that the net sum of humanity is made better off through these folks immigration to the US.
I was just pointing out how odd it is to cite a stagnant percentage of the population who distrust banks and bemoaning that we haven't been able to make a difference in bank-acceptance among the poor while blithely ignoring that we continually import enormous numbers of people who do not trust banks. It's particularly odd when the article you link to as support for the difficulty in lowering that percentage explicitly states that immigration is a huge part of why the number doesn't change.
Similar issues can be raised with poverty statistics more broadly: how awful that the war on poverty hasn't even made a dent! While ignoring that it may, indeed have had a significant impact that has been swamped by an enormous inflow of poor people.
There is a separate debate to be had about whether the national policies of the US should be primarily geared towards benefiting humanity overall regardless of the effect on various groups within the US or those who comprise the US already, but that's neither here nor there for these purposes.
Hi blighter,
Yes I got that bit, that's why I made my anology to kids always starting school unable to read, no matter how well schools performed. What I was responding to in your argument was the idea that immigation made the problem indisputedly worse.
My husband and I were poor people 25-30 years ago, when we were first married. Credit was much harder to get at that time, and overdrafts weren't covered by your bank - if you wrote a check for more than you had, you went and paid for it at the store you wrote it to, and paid a penalty to them.
We used to write checks the night before the paycheck got into the bank - probably technically check kiting but we knew the check would be there the next morning. Also, technically, this was a payday loan, because we hadn't been paid yet. What ended up happening is that we had to do the same thing the next week, and the next, because we'd run out of groceries or gas before the next paycheck came in.
If easy credit had been available, we would most likely have used it. Thank goodness it wasn't. We never did go hungry, although we sure ate a lot of spaghetti.
Maybe people would be going hungry without payday loans, but more likely, they'd be missing a meal at McDonalds and eating ramen noodles instead.
Part of why payday lenders charge high effective interest rates is their processing costs. It costs about the same to process an unsecured loan for $500 as for $50,000.
Also, small loans (that aren't credit cards) have short repayment periods, because of the risk of the customer skipping out as well as the expense of processing multiple payments (someone has to open the envelope, look up the customer account #, credit it in the system, and get the check or cash to the bank, for each payment). So, if the cost of handling an unsecured loan is $50, that's going to be an effective APR of 314% (plus the actual interest charged) on a $500 loan for one month, but an increase in the APR of 0.1% on a $50,000 loan over one year. But it's still the same $50.
For what its worth, i think that there are a few main reasons that people with low incomes dont use banks.
1- Hours. As someone has already mentioned banks usually close around 3 or 4 Mon-Thurs. Guys that work for temporary agencies get paid daily after the banks have closed.
And
2-Many people who make a low income are living transient or semi-transient lifes.So they arent going to settle down and open up a bank account if they are staying in a cheap motel or a rooming house for a few weeks.
And
3-Many banks have mininum balance requirements.
And
4-Many people with low incomes HAVE to pay certain bills in cash rather than check,debit card or credit card.The local corner stores usually only take cash.And if you are in a rooming house or dealing with a landlord that only has a few apartments he/she might only take cash [i know this from personal experience with many landlords]
And
5-If you have a shady landlord, you dont want him/her to know your bank account or credit card number .So you pay in cash or money order.
And
6-Many people with low incomes dont have a large number of bills.The bills that they do have [rent ,ect] take up a much larger chunk of their pay than an upper-middle class person.But they tend not to have to write 10 or more checks a month like many well off people. Once again ,they defintly pay a bigger percentage of their earnings on food and shelter.But dont write as much actuall checks.Many people with low incomes dont even pay a monthly phone bill since they use "pay as you go" phones where you buy minutes with cash at the local store.
7- Thriftiness.There are defintly many lower income people that arent thrifty.But there are many more who are.Many of the people with lower income that i have known like to use cash because its the best way to be thrifty.Many feel that if you dont have the cash in your pocket you shouldn't buy something.You may think that this doesnt apply to checks.But checks can bounce if you forget how much you have in your account. i have known many guys who bounced a check once by accident and used only money orders ever since. For many people the best and easist way to budget is to look in your wallet and see how much is in there.When you only make $150 to $300 a week , paying everything in cash is an easy and simple way to budget your money.You put some money in a jar each week for your monthly rent.And the rest[what little there is] you use for food.If you pay rent weekly its even simpler
It should also be pointed out that most urban liqour stores and bars and corner stores cash checks.There are a hell of a lot more bars,corner stores and liqour stores than there are banks.
I must live in a weird place--Salt Lake/Provo area of Utah--because almost every financial institution here offers a free bank account and extended hours banking. Several banks, like US Bank, have branches in grocery stores. (My main bank, Zions, not only has free banking for my kids, but at the end of each semester, gives them a dollar for every A.)
Based on this, I would suggest people move to the mountain west; we're a bit more sane out here.