You’ve hit rock bottom, perhaps because of choices you’ve made, or perhaps because of some bad luck.
You need money, and you need it now.
Some of us are fortunate enough to have family or friends we can turn to in such situations, some of us are not.
But one of the great things about capitalism is that if there is a demand for something, there’s usually someone willing to meet that demand. It’s also one of the weaknesses of capitalism, since it can potentially create a desire for wealth at all costs.
And that’s where payday lending comes in, a multibillion-dollar industry.
The Philadelphia Inquirer recently had a story about a local entrepreneur who owns more than 25 loan companies, many of which (if not all) were involved in payday lending.
The basic idea behind payday lending is that a person will take out such a loan for short term financial needs, with the hope of paying it off with his or her next paycheck.
Unfortunately, for many people taking out such loans, it doesn’t quite work out that way.
These individuals struggle to pay back such loans, and when they struggle, the lending companies show no mercy. In fact, these types of customers are the most profitable, since interest starts to accumulate.
The article tells the story of one person, a high school science teacher, who needed to take out such a loan, and the interest rate on the loan was 350%. That’s right – three hundred fifty percent. The borrower ended up having to take out more payday loans to cover the payments on previous loans.
Talk about a vicious cycle. And in fact, the payday lending company in this article has charged as much as 800 percent interest on some loans – 133 times higher than the cap for unlicensed lenders in Pennsylvania.
Meanwhile, the lender in this story lives in a $2.3 million dollar home and drives a Bentley. Nothing wrong with that per se, as long as such wealth was earned honestly and by not harming anyone along the way.
Federal prosectors have brought racketeering charges against this individual.
One trick some of these lenders employ is to set up shop on Native American land. By taking advantage of internet advertising and the tribal sovereignty granted to federally recognized Native American groups, payday lenders who set up shop on tribal lands can effectively “export” whatever interest rate they want into states across the country.
Prosecutors have described this strategy — known in the industry as “rent-a-tribe” — as a sham with tribal leaders having little involvement in the businesses other than to collect monthly payoffs. Lawyers for the defendant maintain the practice is legal.
I learned as a teenager, just because something is legal, it doesn’t make it right. I guess not everyone learned that lesson.
To me, there’s some strong evidence against the defendant, particularly his own words:
“In this environment today, you’ve got to run afoul of the regulators. You can’t [survive] if you don’t lend in California or Colorado or New York or Florida.” (These are states with some of the tightest restrictions on payday lending.)
“Let me tell you what my thoughts are on tribes and payday loans,” he said while discussing a rival’s business. “I believe that [regulators are] going to prove that it’s a sham. … I think they’re going to prove that they’re farces. And, let’s face it, they are.”
I couldn’t agree more. These payday lenders are a farce, but unfortunately, they are laughing all the way to the bank.
P.S. Here’s a PBS segment on payday loans, showing the kinds of individuals who might take out such a loan and some of the effects that it has on them and on society as a whole.
*photo from Law Street Media