The payday loan store is white, almost antiseptic, except for the large colorful posters in English and Spanish announcing fast loans, check cashing services, money orders, and prepaid debit cards. The location is a small storefront in suburban Virginia, a few blocks from the last stop on the Washington, D.C., Metro yellow line. The scene bears little resemblance to the gritty loan-shark image evoked by the many powerful critics of “predatory lending.” The only hint of seediness is the large sheet of tinted, presumably bulletproof glass separating the weary clerk from loan seekers.
Why do people here and elsewhere seek short-term, high-interest loans, using a chunk of their next paycheck as collateral? Well, what would you do if you needed $200 RIGHT NOW?
You could put it on your credit card. It’s the American way! Unless, like so many Americans, you’ve already maxed out your cards. The average U.S. consumer carries $6,226 in plastic debt, according to the credit reporting agency TransUnion. With a potentially long financial market contraction ahead, card companies have been aggressively reducing limits and discontinuing new offers. Although the Credit Card Act of 2009 makes it harder for companies to change their terms after the fact, the availability of credit is likely to shrink further. Maybe you need that $200 to make the minimum payments on those maxed-out cards.
You could write a personal check and hope to scrounge some money for your bank account in time to cover the transaction. Such faith has a low rate of return, and dashed hopes can be awfully expensive. A bounced check from a basic Bank of America checking account, for example, costs $35, plus any fees the stiffed merchant tacks on. Many banks offer overdraft protection—they’ll extract the money from you later—but charge between $10 and $35 for the favor. Repeated bounces and overdrafts have more serious consequences. American banks unilaterally closed 6.4 million checking accounts in the pre-recession year of 2005 alone.
You could borrow money from friends or relatives. Obtaining cash from intimates may get you the best interest rate on the market, but costs are extracted through other means. Family reunions can easily become awkward investors’ meetings, and as fans of Judge Judy can tell you, even a small loan can be a remarkably efficient way to destroy a friendship.
You could pay a bill late. A high-risk strategy. Utility and phone providers can be quick to cut off service and charge a disconnect and/or reconnect fee. You could be looking at an extra $40 to $70 penalty every time, not to mention costs incurred in lost productivity.
Or you could get a payday loan. Like I did.
Payday lenders are the redheaded stepchildren of the consumer financial market. According to critics ranging from anti-poverty activists to the president of the United States, the industry exploits the poor by offering loans with bad terms to people who don’t know better. During his campaign, Barack Obama promised to “work to empower more Americans in the fight against predatory lending” by capping “outlandish interest rates.”
The coalition against payday lending is broad and deep, with opponents surfacing in unexpected places. In 2006 the Department of Defense issued a report slamming payday lending to soldiers, sailors, and Marines, characterizing them as “young and inexperienced borrowers” with limited ability to repay. Congress took up the cause, with Sen. Robert Menendez (D-N.J.) claiming that clusters of payday lending shops around military bases “negatively impact military readiness.” The following year saw a new federal law capping the annual rate on loans to active-duty military personnel and their families at 36 percent. In addition to the 12 states that have banned payday lending outright, Virginia has prohibited payday loans to members of the armed forces and their families.
With a powerful ally in the White House, payday loan opponents started to focus their efforts on the federal level. In June 2009, as part of its response to the financial crisis, the Treasury Department proposed consolidating various financial regulatory bodies into a single new bureaucracy called the Consumer Financial Protection Agency. Payday lenders, now largely unregulated on the federal level, are likely to fall under the new agency’s domain, which would make it easy for Obama to reach his goal of extending the military rate cap to “all Americans.”
As new post-crisis financial regulations began taking shape, the president and others started lumping payday loans with credit-default swaps, no-documentation mortgages, high-interest credit cards, and other financial products designed to make it easy—perhaps too easy—for the poor to take on debt.
Terms for payday loans can seem onerous. Interest rates on the short-term deals, measured on an annualized basis, often reach 400 percent. Borrowers who are living paycheck to paycheck can find themselves coming up short after the initial loan, beginning a cycle of indebtedness with ever-higher interest payments. But several recent studies suggest that well-intentioned restrictions on payday lenders wind up harming the very people such laws are intended to help, reducing their access to emergency cash and prompting them to use costlier, more dangerous, and more credit-damaging options.
Approaching the Virginia payday loan store in the freezing winter wind, I’m greeted by festive green banners offering check cashing for tax rebates. Inside, the line is composed entirely of females, mostly black women in early middle age. Judging by their clothes, several are on lunch breaks from white-collar jobs. I’ve only just arrived, but my fellow loan seekers are getting restless. The line is 10 people deep and moving slowly.