Exposing the Payday Loan Shell Game
Aug 18th, 2012 | By NathanF | Category: Financial, Personal finances, Top Headline | Print This Article
Almost everyone has experienced a temporary financial shortfall at one time or another. When facing a money crisis caused by a sudden emergency, the loss of a job, or higher- than-expected expenses, the common course of action has always been to tighten your belt, find a way to save wherever you can, maybe sell something of value that you own, and, as a last resort, perhaps borrow some money from friends or family members if there is no other way to get out of trouble.
But we live in an age where easy money has never been easier, thanks to the practices of the banksters and the other chargers of usury, who are always standing by ready to lend a hand – as long as you agree to pay them back the whole arm in return, of course. The moneylenders have now become so influential that they have actually gained the power to take down the entire world economy, which they almost did back in 2008. Money lending and credit-granting practices of all types have, for some unfathomable reason, been allowed to become the backbone of our entire financial and economic system, as virtually all of our most basic productive activities are now being backed in some way by usurious practices that are draining the very lifeblood from the real sources of America’s wealth, most especially its working men and women.
While the banks and the credit card companies are bad enough, it is the scalawags from the payday lending industry who have taken usury to a whole new level. For those who are not familiar with how this scam works, payday lenders grant short-term loans of between $500 and $1000 at astronomical interest rates to people who are facing financial difficulty and need money fast. Secured by post-dated checks at physical locations or by bank account information when taken out online, payday loan recipients usually have two weeks to pay back the money, plus a fee that will range from 15 to 20 percent of the original loan amount. If for some reason they cannot pay, then interest charges will start to accumulate and will continue to accumulate for as long as the debt remains out standing. As hard as it might be to believe, the annual percentage rate of payday loan interest can run as high as 400 to 500 percent – and yes, at the present time, charging this amount of interest is entirely legal. If the Godfather Don Corleone were alive today, he would have undoubtedly left the Mafia behind to start his own payday loan company.
One of the big attractions of payday loans for borrowers is that they do not require a credit check the way a regular bank loan or a credit card application would – people with bad credit or no credit at all can get loans fast if they have a job and a checking account and can show the payday lender some evidence of their income. Payday loan companies advertise themselves as knights in shining armor, ready to come to the rescue of anyone who suddenly finds themselves in a tight spot and in need of cash quickly, but of course no one is required to prove exactly what they plan to do with the money. So while these lenders supposedly exist to help those facing unexpected financial problems caused by health issues, car troubles, theft, fire, and so on, research has revealed that most people actually take out payday loans to pay their rent, buy food for their children, or cover the cost of their utility bills. Basically, the payday loan industry exists to exploit poor people, especially those with families, who are desperately trying to survive and feel like they have no choice but to ask for money now even if they are not sure they are going to be able to pay it back.
A Business Model Of Evil
Ideally, someone would only take out a payday loan if they truly were facing an emergency and would have little problem paying back the loan once their next paycheck is cashed. But this is not how it works out in the large majority of the cases. Most payday loan recipients are repeat offenders, so to speak, and despite the fact loans are supposedly due for repayment in two weeks, a study by the prestigious Pew Center discovered that people who borrowed from payday loan companies were indebted for an average of five months during the year in which the money was borrowed. Revealingly, 76 percent of all new payday loans taken out during any given year will go not just to repeat customers, but to those who had a previous loan come due within the previous two weeks. What this means is that most of these loans go to borrowers who already had one loan, couldn’t repay it, and had to take out another loan just to pay off the original.
Anyone with even the slightest understanding of how interest works will realize immediately that the practice of taking out loans to pay off loans will only put a person deeper and deeper into debt, but in reality this is exactly the pattern that allows the payday loan industry to rake in the big profits. For payday loan companies, customers who take out an original loan with a $15 fee added would need to receive between four and five loans in sequence before they would actually represent a good investment, which means that these lenders absolutely count on loan recipients being forced to roll over their debt repeatedly, paying more and more interest until they have been bled almost completely dry.
When you have an industry whose profits are entirely based on taking advantage of those without choices, it is hard to imagine how such a business can even be allowed to exist. In fact, fifteen states have now prohibited payday loan operators from setting up shop in their jurisdiction, while eight others allow these companies to exist but regulate loan terms to make things better for borrowers. At the federal level, the Consumer Financial Protection Bureau was created to begin regulating this industry more completely, although just exactly what this organization plans to do is not clear at the moment.
But what certain members of Congress hope to do in the near future is crystal clear. Rather than reigning in the usurious payday loan vultures, who in the past have essentially operated as a non-violent legalized version of the loan shark industry, these legislators would instead like to set the payday loan companies loose on a new reign of terror that could send their profit margins soaring to previously unimaginable levels.
A Rose By Any Other Name Still Has Its Thorns
The innocuously entitled HR 6139, sponsored by Reps. Luetkemeyer (R-MO) and Baca (D-CA) expresses its intention to create a federal charter for “National Consumer Credit Corporations,” which is just another fancy name for payday loan companies. These National Consumer Credit Corporations, as they will now be called, are the online payday lenders, who undoubtedly represent the future of this dirty business. As of 2012, about three-fourths of the loans given out by the industry have been distributed through storefront operations, but the other 25 percent have come in the form of internet payouts by companies that operate exclusively in cyberspace. With laws being passed in so many states restricting the usurious depredations of the storefront-style payday lenders, however, estimates are that by the year 2016 over 60 percent of all payday loans will be taken out electronically, and this percentage will likely grow even further as time advances.
In other words, in the years to come, the big money in legalized loan sharking will be made online, which perhaps explains why some in the House of Representatives suddenly want to create a new federal charter system that would require the Comptroller of Currency to issue licenses to online payday lenders that would exempt them from any state control. In overlooking the tenth amendment’s admonition that “the powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people,” the House sponsors of this bill hope to do an end run around the perfectly reasonable attempts by states to regulate the practices of all predatory usurers, including those working online, who wish to exploit the economic troubles of their most vulnerable taxpaying citizens.
If HR 6139 eventually passes – and the fact that it has bipartisan sponsorship is an ominous sign – it will lead to the creation of a rogue industry that is left completely free to pick the bones of those who are struggling to survive in a dying economy. To show how biased in favor of the rotten payday loan industry this bill really is, it would actually eliminate the requirement that these companies disclose to their customers how much they will have to pay in interest if they don’t pay back the money on time. The bill would require Internet lenders to discard the fourteen-day repayment limit in favor of one that lasts for at least 30 days, but this is really just another attempt to help a discredited industry re-brand and re-invent itself so that the public will not realize the type of shady characters they are actually dealing with.
Usury With A Vengeance
“If thou lend money to any of my people that is poor by thee, thou shalt not be to him as an usurer, neither shalt thou lay upon him usury.” Exodus 22:25
If there is one thing the Bible is clear about, it is that usury, or the charging of abnormally high interest on money that has been lent to someone in need, is a practice that should be condemned and prohibited. And as the above quote from Exodus makes clear, usurious exploitation of the poor is considered an especially grievous sin that should not be tolerated in any civilized society. But in a global economy that has shown itself willing to sacrifice any moral principle if that is what it takes for powerful actors to accumulate more wealth, the religious, ethical, and historical sanctions against usury have been dismissed as quaint notions best left to another age. We now have a financial system that is completely controlled by greedy bankers and others who have found a way to make money off of money while adding nothing useful to the world’s inventory of goods and services, and the payday loan industry is a particularly despicable example of this type of parasitical operation.
The only advice we can give those who are struggling to stay afloat in an economy that no longer rewards hard work and honesty is to avoid these predatory lenders at all costs. No matter how grim your situation might seem now, if you choose to do business with payday loan companies, things are likely to get very much worse before they start to get better.
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