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Friday, September 30, 2005

an interesting trap

If you lend money to my people, to the poor among you, you shall not deal with them as a creditor; you shall not exact interest from them.

- Exodus 22:25

They are called payday loans, and this is the way they work:

Let's say Joe is short $100 and has maxed out his credit cards. Joe goes to a payday lender. The lender gives Joe the money, and Joe writes a check for $100 plus a surcharge of, say, $15, dated two weeks in the future. Between now and two weeks, Joe gets his next paycheck, and the loan is covered.

But what happens if Joe's next paycheck doesn't cover the loan? What if the reason he is short is because his job doesn't pay him enough to quite make ends meet? Then, two weeks from now, Joe may have to borrow another $100 and write another $115 check, just to cover the check he wrote today. If this keeps up, by the end of the year Joe will have paid $390 interest for a $100 loan. That's 390% interest, enough to make credit card companies look downright generous.

In the wealthiest nation in the history of the world, payday loans are the only option for many low wage earners to guarantee that the bills can always be paid. But they are also a trap: If a poor person takes a payday loan, the interest may be enough to prevent the next paycheck from covering the bills, thus he or she needs to take another payday loan. The cycle can be endless.

Several solutions come to mind.

In a nation this wealthy, we could guarantee that the minimum wage is a living wage: Take the poverty line for a family of three, say, and calculate what a person would have to earn at 40 hours a week to meet that income level. That would become the new minimum wage. It would be recalculated annually. This will not happen with the current Congress and President.

States could set a maximum allowable interest rate for nontraditional lenders. Even setting it at credit card rates -- around 20% annual -- would drop the two-week fee low enough that payday loans would not be worth the lenders' time.

But here's an entirely different sort of idea, derived from the concept of microlending. Suppose a nonprofit agency -- perhaps a church ministry -- offered payday loans at 0% interest? There would have to be safeguards to prevent people from abusing the system. There would have to be a limit to the amount a person could borrow. To receive the loans, recipients might have to attend a budgeting class. They might also be required to join a support group. There's probably a lot more details to work out, but is this doable? Would it work?

What do you all think?

Updated Oct 4, 3:30 pm - made corrections to the math


At 9/30/2005 11:30 PM, Anonymous Anonymous said...

This post has been removed by a blog administrator.

At 10/01/2005 10:07 AM, Blogger Monk-in-Training said...

Yes, I think it WOULD work. I also think it could be a good outreach method. Lending with no interest. Yes, expecting it to be paid back, but not with interest. I like it, and it seems to be FAR more Biblical (in this most Christian of times)than the payday scams that flourish in these United States.
† Bless you for a great idea.

At 10/04/2005 1:32 PM, Anonymous Anonymous said...

This post has been removed by a blog administrator.

At 1/09/2010 4:37 PM, Anonymous Anonymous said...

Bookmarked this. Thanksgiving owing to you against sharing. Definitely worth my time.

At 1/18/2010 1:49 AM, Anonymous Anonymous said...

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