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The Debt Resisters’ Operations Manual

Chapter Eight

Fringe Finance Credit Products and Services: Credit for the Precariat

“Respectable” banks and financiers have always tried to distance themselves from the taint of loan-sharking and other fringe financial services. For many people, non-bank lending has traditionally conjured up images of dilapidated storefronts on the edge of town, surrounded by vice and petty criminality. But if you’re one of the twelve million Americans who took out a payday loan in the past year, it’s more likely that you did it in a suburban strip mall or cyberspace. It’s even possible that you got it from a bank—five large banks, including Wells Fargo, have begun to offer payday loans. (They call them “direct deposit loans,” but don’t be fooled; they’re just as bad.) Although they seem to be worlds apart, in reality these banks and fringe finance are interconnected and overlapping; the biggest players in all segments of fringe finance are publicly traded, national corporations. Around 20% of all users of “alternative” financial services (AFS) also use traditional banks. And even fringe financial services earn profits for wealthy investors—via the very “asset-backed securities” that brought down the financial system not too long ago. Whether sourced in prime credit or subprime, student loans or pawn loans, the profits of our indebtedness flow to the wheelers and dealers on Wall Street.

But people are waking up to the bait-and-switch.

This chapter covers the debt traps encountered outside of the federally insured financial institutions: AFS credit products and services such as payday loans, pawnshop loans, auto-title loans, and “rent-to-own” agreements. Like traditional banks, these businesses provide ready access to cash and credit. However, their services are substantially more costly than those typically offered by major banks, and they frequently involve even more unfair, abusive, and deceptive practices. Unlike the transaction products from the previous chapter, these credit products involve lending money rather than charging people to access money they’ve already earned.

Enabled by friendly regulations at the local, state, and national levels, the poverty industry preys on the poor. For a long time the working poor have been its main target, but the Great Recession has supplied millions of new potential victims: people with busted credit, people who are desperate for cash, and people who have fallen from the ranks of the disappearing U.S. middle class. At a time of unprecedented inequality, poverty, and precarity, unprincipled money lenders are poised to make a killing; indebting people, possibly for life.

During the 1990s, deregulation tore through every segment of the U.S. financial system. Lending standards were loosened, increasing the availability of credit on Main Street as well as Malcolm X Boulevard. The resulting proliferation of high-cost subprime loans was celebrated as the “democratization of credit.” The rolling back of core financial consumer protections created an unprecedented opportunity for financial extraction—the prospect of making money off of people who have no money. On the fringes of finance, money comes easy, but debts are built to last.

Given that median net worth fell 38.8% from 2007 to 2010, rising demand for “Quick Cash, Few Questions Asked!” should come as no surprise. When people have maxed out their credit cards and bank credit lines, they increasingly rely on AFS providers. Most AFS borrowers have tended to be the unbanked, which includes about 20% of Blacks and 20% of Latino/as. But today twenty-one million borrowers fall in the “underbanked” category, meaning they use AFS in combination with traditional banking services.

About half of AFS users have incomes below the poverty line, but it’s quite possible that many of the underbanked not too long ago qualified for prime mortgages and boasted incomes considerably higher than the national median. These are sure signs of precarity: insecure and unpredictable living conditions, which threaten both material and psychological welfare.

Compared to traditional bank loans, fringe lending has a unique and peculiar set of tricks and traps. But like any extension of credit, it involves a set of expectations about the future. Lenders exploit borrowers’ dreams. In fringe finance, the aspirations tend to be more immediate, like having a way to get to work, buying groceries for your kids, bailing your cousin out of jail, or treating your mother to lunch on her birthday.

Payday Loans: How Short-Term Loans Become Long-Term Debts

Three-quarters of workers in the United States report living “paycheck-to-paycheck,” defined as not having enough money saved up to cover six months’ worth of expenses. After years of insufficient income, we’ve drained our savings just to cover necessary expenses. Those of us who’ve never been able to accumulate savings already depend on short-term credit to get by. We’ve gone into debt in order to live.

In the early 1990s, there were fewer than two hundred payday lending stores in the United States. Today there are twenty-three thousand—more than there are McDonald’s locations—making payday lending a $50 billion industry. The deregulation of interest rates at the end of the 1970s, which removed all caps and limits on interest, set the stage for the “rise of payday.” Today, fifteen large corporations, which together operate roughly half of all loan stores, dominate the industry. Of these fifteen, six are publicly traded companies: Advance America, Cash America, Dollar Financial, EZ Corp, First Cash Financial, and QC Holdings. Many of these companies also operate payday loan sites on the internet.

Having witnessed the rapid and socially destructive effects of these loans, fifteen states have renewed consumer protections and rolled back authorizations of payday loans, eliminating payday loan storefronts. Another eight states have limited the number of high-cost loans or renewals that lenders may offer. The reforms’ effectiveness, however, has been limited by the advent of unlicensed online payday lending, which now comprises 35% of the market and allows for even more egregious practices.

The appeal of payday loans is the flip side of the barriers to traditional banking: convenience, ease of transaction and few questions asked. Payday loans are small-credit loans marketed as a quick and easy way to tide borrowers over until the next payday. However, the typical storefront payday loan leaves borrowers indebted for more than half of the year with an average of nine payday loan transactions at annual interest rates over 400%. And if you think that’s bad, try 800–1,000% APR in the case of online payday loans.

Make no mistake: payday lending is legal loan-sharking. The aim is to prolong the duration of debt in order to extract as many fees as possible; this is known as “churning,” and doing this every two weeks makes up 75% of all payday loan volume. Typically, payday loan debt lasts for 212 days. Repeated payday loans result in $3.5 billion in fees each year.

Payday loans are carefully structured to bring about this result. When you take out a payday loan (normally $100 to $500), you put down collateral (e.g., a postdated check or electronic access to your bank account) equal to the loan amount plus a fee ($15 to $35 per $100 borrowed). At the end of the typical two-week loan period, you either repay the total owed or renew the loan for another two weeks. Few borrowers (only 2%) are able to afford the entire payment, so instead they pay only the fee and renew the loan, which grows in size due to compound interest. With every renewal, the amount owed grows bigger, making repayment ever more difficult. In the meantime, the lender goes on extracting fees every two weeks, and pretty soon, you’ve repaid the amount of the original loan (the principal), yet you are forced to continually renew the loan until you can repay the hugely inflated balance in one lump sum. According to the Federal Trade Commission, a number of online lenders obtain borrowers’ bank account information in order to deposit funds and later withdraw the repayment, with a supposed one-time fee. In actuality, withdrawals occur on multiple occasions, with fees each time. The FTC cites a typical example where someone borrowed $300 and, after the lender withdrew many times, the borrower was ultimately charged $975. With payday loans, the term “debt trap” takes on a whole new meaning.

The payday industry lobby group, which misleadingly calls itself the Community Financial Services Association (CFSA), tries to get some cover for its predatory behavior by warning, “Payday advances should be used for short-term financial needs only, not as a long-term financial solution.” In actuality, the vast majority of borrowers (69%) use payday loans for everyday expenses, just to get by. A recent Pew survey shows that only 16% of borrowers actually used them in emergencies.

Still, twelve million Americans have used payday loans over the past year. And who can blame them? If you have lousy credit and need cash fast, a short-term, no-credit check loan seems like a lifeline, a feeling reinforced by ubiquitous advertising. No doubt, the loans offer short-term relief, but in exchange for long-term financial harm. According to the CFSA, “payday advance customers represent the heart of America’s middle class.” This particular industry talking point has truth to it. The core market for payday loans are people with regular incomes and bank accounts who are expected to “secure” their loans with pay stubs, benefit stubs, or personal checks—that is, the growing class of the underbanked.

A recent survey of payday loan users conducted by the Pew Center finds that most borrowers are White, female, and from twenty-five to forty-four years old. However, certain groups disproportionately use payday loans: those without a four-year college degree, home renters, Black people, those earning below $40,000 annually, and those who are separated or divorced.

People of color are targeted by payday lenders and by fringe finance more broadly. Like other forms of AFS, the immense expansion of payday lending has overwhelmingly taken place in communities of color. In California, for example, Black people are more than twice as likely as Whites to live within a mile of at least one payday lender. The CFSA and leading payday lenders have for years cultivated relationships with Black leaders and organizations—lawmakers, celebrities, elders of the Civil Rights struggle—as part of their lobbying and marketing campaigns. “Just like they target minority groups to sell their products, they target minority groups to make their products look legitimate,” says critic Keith Corbett, executive vice president of the Center for Responsible Lending.

Backers of payday loans argue that payday lending represents the “democratization” of credit, but this claim is misleading at best. The kinds of credit payday lenders are selling leads only to cycles of ever-growing debt. It may provide access to credit, but for the majority of payday borrowers, it is a form of credit that makes their financial situation worse rather than better. Furthermore, “democratization” of finance, under any reasonable interpretation of the word, would mean enhanced ability to have a voice in one’s financial situation. Extracting the little wealth that poor and middle-class people have with non-negotiable, misleading, barely legal, and intentionally unexplained contract terms does anything but.

Ways out

(The content in this section is adapted from: Anonymous payday loan insider, e-mail to author, July 29, 2012.)

Alternative lending is an industry that profits off of interest rates that used to be illegal, have always been illegal in just about every other country, and have been condemned in many faith traditions as usurious. Although limited, there are other options. Some community organizations and many credit unions offer small, short-term loans at much more favorable rates. While it is best to avoid payday lenders entirely, if you have outstanding debt with a payday lender, remember:

  • Payday loans are unsecured debt. This is any type of debt or general obligation that isn’t collateralized by a lien on specific assets, like a house or car. In the event of default, the lender has no legal claim on your assets, no matter what the debt collectors say.
  • Many people default, and expectations of that outcome are built into the business model. The typical “risk premium” (the cost increase required to compensate for credit risk) is so high that even with 15–20% default rates, payday lenders are highly profitable.
  • In the event of default, lenders’ only means of retaliation is to report the event to a credit reporting agency (CRA). They commonly try to persuade borrowers that repayment of payday loans strengthens credit—the industry even funds research to peddle this myth—but it’s not true. Most payday lenders don’t report their loans at all to CRAs.

Pawnshop and Auto-Title Loans

A pawnshop loan is when a borrower gives property to a pawnbroker to secure a small loan. The loan is generally for half the item’s value. If the borrower is able to repay the loan with interest by the due date—typically between one and three months—then the item can be retrieved. The average pawnshop loan is for $70, and approximately one out of every five pawned items are not redeemed. According to a survey by Think Finance, approximately one-quarter of eighteen- to thirty-four-year-olds who are un- or underbanked use pawnshops. Because U.S. citizenship and regular income are not required for pawn loans, they are particularly appealing to undocumented immigrants and others who might have difficulty obtaining loans through traditional financial services. Ten states do not require any cap on monthly interest rates and forty states do not require the return of pawned items.

An auto-title loan is a similar product to a pawnshop loan, but even more egregious—so much so that it is prohibited in thirty-one states. A borrower in this case exchanges the title to their automobile for cash. The vehicle can still be driven, however. Typically the loan is for about one-quarter of the vehicle’s value. If it is not repaid with interest within thirty days, the lender could repossess the car or extend the loan for thirty more days and add further interest. When annualized, the rate of interest for title loans is in the triple digits, and often exceeds 900%. LoanMax, an auto-title lender for which Reverend Al Sharpton, of all people, did a television commercial, says its average loan is $400. Suppose you take out a $400 title loan from them at 360% APR—clearly a usurious interest rate yet far from the worst when it comes to these kinds of loans. Thirty days pass and you can’t pay the $520 you now owe. Instead of repossessing your car, the merciful lender decides to renew the loan. And then again. And again. Title loans are renewed on average eight times per customer. Therefore, within a typical timeframe, you may end up owing nearly three-and-a-half times what you originally borrowed!

Having property repossessed and incurring further debt are the tragic yet unsurprising consequences of obtaining a loan through pawning. Despite state regulations such as APR caps, these alternative financial services are inherently predatory and cannot be modified to be substantially less harmful to borrowers. Pawnshop loans and auto-title loans should be avoided at all costs.

However, so long as viable alternatives remain inaccessible to those typically targeted by such institutions—traditionally low-income people of color, but increasingly Millennials of all backgrounds—the problem will remain and intensify. At the conclusion of this chapter, we contemplate a handful of suggestions for obtaining cash without having to be on the receiving end of predatory lending practices.

Rent-to-Own Stores

Rent-to-own (RTO) lenders offer appliances, electronics, and other items which, as the name suggests, people can eventually own. This is different from credit purchases where the customer immediately gains the title to the product. Aaron’s and Rent-A-Center are two of the biggest such companies; their mascots are a self-proclaimed “lucky” dog and Hulk Hogan, respectively. On both company websites, product prices are not listed; you must provide some personal information, such as the last four digits of your Social Security number, in order to even receive a quote. Aaron’s explicitly states that its stores are “strategically located in established working class neighborhoods and communities,” which is a euphemism for exploiting poor people and people of color. This predation is also unabashedly reflected in RTO companies’ own annual reports. Despite having fewer than half the number of customers as payday lenders, the RTO industry generates similar revenue. What accounts for such high sales?

Unsurprisingly, there’s a whole host of fees when using RTOs. Charges often include “security deposits, administrative fees, delivery charges, ‘pick-up payment’ charges, late fees, insurance charges, and liability damage waiver fees.” These costs are generally not revealed to customers until after the fact. Less than a third of U.S. states require disclosure of the total cost to own, and even then, many of these aforementioned charges are underestimated. With all of that on top of an average APR around 100%, consumers typically pay between two and five times more than if they had purchased the same item at a retail store. On average, RTO customers spend an extra $700 a year. Failure to pay in full, or defaulting, results in the repossession of the product and loss of any money previously put toward the item. Only eleven states require any cap whatsoever on the price of products or APR at RTO lenders.

Items available at rent-to-own stores are readily available elsewhere, in some instances for one-fifth of the price; however, this may require saving up until one can afford the retail value rather than resorting to paid installments. If you need a computer, for example, consider borrowing one or using one at the library until you can pay for it at a not-so-predatory store. Avoiding RTO stores also might mean being willing to relinquish a bit of luxury and buy items secondhand. Either way, it ultimately beats the pitfalls of RTO lenders.

There are also many items that you can even obtain for free, although it may require waiting for just the right moment and taking time to do some research. Websites like the Freecycle Network and the free section on Craigslist have made this process much more convenient and accessible.

Survival Strategies

Throughout the last two chapters, several strategies have been raised for avoiding or beating the various institutions that offer “alternative” financial services. These chapters have been written with the understanding that viable alternatives are hard to come by in many areas. In the course of doing this research, we have too often found that the recommended alternative to one segment of the fringe finance industry is simply a different segment.

The most important point is that we have to work together toward rendering all such institutions obsolete, toward a situation where people can have basic needs met without immense risk or sacrifice. In the meantime, we need to be able to sustain ourselves. Notably, at least one-quarter of unbanked households in the United States do not use any fringe finance products or services. That is, over two million households are getting by without a checking account, without subprime loans, without cashing checks at CCOs, and without pawning their items. These households in particular have experiences worth sharing and learning from. In Chapter Eleven, we will discuss some strategies for decreasing our personal and collective dependency on these institutions.

The unbanked and underbanked can in certain instances avoid subprime loans. This may mean asking to borrow from friends or family, seeking emergency community assistance, and, if an option, asking your employer for advanced payment. Selling unwanted items on Craigslist or at thrift stores and consignment shops is a more reliable source of cash than pawning. Moreover, it’s important to consider what you need the money for in the first place. Is there an alternative at a cheaper price, or perhaps a free alternative? Will buying something secondhand suffice? Is it worth obtaining something immediately if it means paying more?

While these questions are important for individuals to contemplate in order to avoid or at least minimize the harm done by AFS providers, we must go deeper. The Debt Resisters’ Operations Manual, after all, is about collective action and radical transformation, not deepening personal sacrifice.

It is more difficult to point to an emerging movement around fringe finance than other aspects of financial capital outlined in this manual. Even so, some communities are beginning to take action in ways that might illuminate the contours of a possible social movement. In Dallas, communities have organized to enact local ordinances curbing payday lending. There has been a grassroots campaign in Sunset Park, Brooklyn, to pressure money transmitters to take on more just practices. Community organizers in Jackson Heights, Queens, are working to establish a community development credit union in a largely immigrant neighborhood. While these campaigns are locally focused, and aim primarily for inclusion into mainstream banking and credit or to regulate the most egregious aspects of fringe finance, they indicate that communities affected by fringe finance are increasingly ready to take political action and that victories, albeit small for now, are possible. How would these local experiences translate into a national movement? What strategies would move beyond demands for inclusion and regulation, toward addressing the root causes of poverty and building sustainable alternatives?

While they may be designated as “fringe,” the payday loan companies, the rent-to-own stores, the pawnshops, and the check-cashing outlets are all central to the debt landscape we are describing in this manual. We must come together to work toward the eradication of these venal institutions while creating better ways of obtaining what we need.

Resources

Websites

Financial justice research and advocacy for low-income and underrepresented communities

For filing complaints and reading complaints of other consumers

Articles and Books

General

Payday loans

Pawnshop and auto-title loans

Rent-to-own stores

References