Near the top of the list of things I despise is companies that take advantage of the plight of the poor and desperate. But just above that on my list is something I hate even more: being poor and desperate. That’s why I loathe payday lending companies that charge usurious interest rates—and why I’m not yet ready to see them abolished.
Here’s how payday lending works. If you have a job (and pay stub to prove it), a payday lending company will allow you to write and cash a post-dated check. For this service the company will charge an absurd interest rate. A typical two-week payday loan with a $15 per $100 fee equates to an annual percentage rate (APR) of almost 400 percent. So if you need $100, you write the check for $115 and they’ll give you $100 in cash. Two weeks later they cash your check or you can renew or “rollover” the amount—for an exorbitant fee.
Why would anyone agree to such terms? Because they have no other choice. About twenty years ago I made some terrible choices and found myself in a serious financial bind. The amount I needed wasn’t much—about $200—but without it I wouldn’t have been able to pay my rent. I took out a payday loan that cost me $30 every two weeks. It took about eight weeks to get clear of the loan, resulting in a cost of $120 to borrow $200 for two months.
If you’re middle class and think of it in terms of interest rate, that repayment cost sounds appalling usurious. And it is. But as the poor will tell you, man does not live on APR alone. Having to pay an extra $120 was cheaper than having to find a new place to live. Yes, it was a bad deal. But it was better than all my other choices.
That is why I believe every serious critique of payday lending needs to be accompanied by a serious proposal to help those who are trapped by such “poverty problems.” An excellent example of an alternative approach is the one offered by Wesley Memorial United Methodist Church in Richmond, Virginia. One of their church members, Nina McCarthy, was initially trapped in the vicious payday lending circle: