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I occasionally glance at the "Payday Loan" storefront, without really thinking about the business. The linked article explains that the Payday Loan business is a horrible debt trap. It's even worse than credit cards.

Dragged Down by Debt
People with shaky credit are getting suckered by risky loans against their paychecks, homes—and even cars.
by Jane Bryant Quinn, Newsweek

...With a payday loan, you write a postdated check against your next pay period and walk away with cash. The fees are stiff—Harris usually pays $50 for a $250 loan. In two weeks, the loan falls due. If you can't pay, it costs another fee to renew the debt for another two weeks. annual interest rate of 521 percent....

Car-title loans can get consumers into even more trouble...You can borrow anywhere from $250 to $2,500 against a paid-up vehicle, giving the lender your title and a duplicate car key as security. There's a fee upfront and a triple-digit interest rate, the loan falls due in 30 days, and each time you renew you're charged the fee, plus interest, all over again. If you can't pay, you lose the car or truck you may need to get to work....

Payday and car-title lenders tend to cluster in low-income neighborhoods—especially around military bases, where families are young and borrowers aren't very savvy about interest rates. Congress recently slapped a 36 percent interest-rate cap on loans made to members of the armed services. But it left out everyone else, who pay rates that sometimes exceed 700 percent...

People who need this kind of loan are probably the least likely to be able to understand the trap. They are also the least likely to be able to pay off the loans.

The arguments for and against high-interest consumer loans are the same as for option-ARMs. They provide a source of credit, and potential for living a "richer" lifestyle, for people who wouldn't qualify for prime lending. They also get a lot of those people into financial trouble.

Quinn writes about a couple of handicapped brothers, who borrowed $250. After they paid off less than the entire amount, in a few months, the interest had accumulated, until the amount still to pay was higher than the original amount. They got a Legal Aid lawyer, who claimed that can't read well enough to understand the loan documents. The lender was willing to forgive the loan, but the lawyer wants to sue for damages.

I think that usurious lending is deplorable. However, if an adult is responsible enough to sign on the dotted line (i.e. doesn't have a court order of incompetence), he should be held responsible for his contractual agreements.

According to the Center for Responsible Lending, lenders collect 90 percent of their revenue from borrowers who cannot pay off their loans when due, rather than from one-time users dealing with short-term financial emergencies.

Payday lenders cost American families $4.2 billion every year in predatory fees. The Center for Responsible Lending supports a cap on interest rates for consumer loans in the 36-percent range.

Those who believe in a paternalistic role for government will support laws restricting predatory lending (I do). Those who believe in unrestricted free enterprise and the marketplace will not.

I think that schools should teach children how to recognize and avoid horrible debt traps.


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