Sunday, August 12, 2012

Think 3x Before Taking Out a Payday Loan 1/3

Think 3 Times about Payday Loans

The Vulture Culture of Payday Lending

Off all the tips sheets postings I will write, this is probably the most challenging. This is the first of 3 separate posts, one for each way to "think."

I want these posts to be succinct—but the history, practices, and deep levels of cultural and personal assumptions are complex. There are also some minimum legal rights and protections, but these are complicated and I am not an attorney, but I can read. 

Let's get that clear first, then. I am not an attorney. If you are reading this, please find the nearest non-profit offering financial coaching and legal assistance.

To get in the right mindset to compose my posts, I surf the other posts on the web on the topic. It is quite enlightening. The first thing that I notice is how many posts are touting that taking a payday loan is a good thing. These I suspect are being generated by the public relations firms working on behalf of the payday lending industry (PDLI). They have organized themselves into an aggressive lobbying force: The Consumer Finance Services Association.

A quick look at their site is instructive: it's all about the customer, how knowledgeable customers are about their loans, whether people get into a cycle of debt, etc. A search on the term "usury" (charging of excessive interest) returns 2 reports supportive of this industry. Many other trade associations websites will tell you about themselves: how many people are employed, the contribution of the trade to the well-being of their customers, or the impact of the group on the economy. Not this one. The research can be found, however, and, in 2009, 23,000 payday lending stores  generated a $70 billion nationwide market. In my home state of Washington, 85 companies had 424 locations and made  slightly over $434 million in loans in 2010.

I titled this post the vulture culture because payday lenders and their relatives organizations (pawn shops, check-cashing services, and those charging high fees for money orders and money transfers) are preying on people with limited financial resources who feel in desperate need of quick cash. This is a predator-prey dynamic, as viewed by critics of this practice (of which I am one, just to state my position clearly). The PDLI presents themselves as friends of the common woman (their most frequent customer) helping out these poor people when the banks and other institutions have abandoned their neighborhoods and left them no where to turn. And, though they must post their Annual Precentage Rates, the terms the PDLI uses itself is "fees" or "charges." 

These fees and charges do add up. They literally suck money out of circulation in the poor communities of this country and into the hands and communities of the already wealthy. The PDLI helps some rich get richer, and many poor get poorer.

On this bill-sized tip sheet I had room for 3 suggestions. Let's look at the first:

(1) Think about alternatives. Every loan has an annual percentage rate (APR)—the interest cost above the loan amount you owe. The lower the APR, the better the deal. A $500 payday loan’s APR = 390%! See for yourself at:

The Washington State Department of Financial Institutions posts a checklist to help people think before getting a payday loan. One of the alternatives, and maybe one often overlooked, is see if you can negotiate a payment plan on non-interest charging bills like telephone and utilities. Employers might be able to advance your salary, friends and family might be open to lending you funds. 

If you must resort to short-term borrowing, comparison shop. Focus on the APR. Be thorough. To keep the consumer off-balance, many payday companies and banks use other terms such as fees, charges, or penalties. Look over their explanation carefully and insist that all costs to you of borrowing the money are reflected in the calculation of the APR. Even if you think you understand, go over the numbers with someone who can confirm your calculations.

After this urgent emergency, one alternative is to spend on the usual categories, but spend less, slowly saving up the difference. The first step is to decide why you're saving and what your goal amount is. 

Many people have a misconception that to save they need a large lump sum, and for that they save a portion. That may work for the lucky few who win the lottery. But everyone can save. Here are a few tips how:
  • Shift to buying the smallest sized drink rather than the largest
  • Spend less on alcohol
  • Tone down the expense of the holiday and birthday gifts
  • Cut back on your smoking
  • Buy fewer and less expensive clothes 
  • Walk short distances rather than driving or taking the bus
This is a question of priorities, that is, deciding what you hold as important and then keeping your focus on that. For many parents the success of their children is their priority, so there's always something in reserve when it comes to supporting their children's success in life. I once co-facilitated a Saturday class for youth caught using alcohol or street drugs at school. The youth would be suspended for 90 days, unless they came to this class with a parent or guardian. 

I always wanted to know what the youth plans were, where did they see themselves after high school? One girl loved fabrics and fashion design and wanted to go to the Fashion Institute of Technology in New York. I asked if she had a sewing machine. No, but of course she wanted one.

It happened that a few weeks later a co-worker offered a working older model sewing machine for $5. I drove it out to the girl's apartment complex. She loved it, her eyes afire. Her parents didn't see this because they were on the sofa watching TV. 

I told her folks it was $5 for the machine. Without looking up they said they didn't have the money. "Yeah, right," I thought looking at their coffee table covered with empty beer cans and cigarette cartons. [A carton of cigarettes was more than $5.] Seeing the girl's disappointment as this bridge to her future, her dream future, might disappear in front of her eyes: "The machine's yours," I said, "I got you covered." My $5 contribution to her future.  I can only wonder: Did the parents even have priorities for themselves, much less for their child? 

Look for the second post on thinking before taking out a payday loan in a few days.