Payday Loans: A Pound of Flesh—Fees May Apply
In my part of East Austin, we have almost no retail stores, few restaurants other than fast-food joints, and one small, mediocre grocery store. But our cup runneth over with payday loan shops and auto-title lenders. You may have to drive miles to find a bank, but within a few minutes you can get $1,500 from any number of friendly neighborhood dealers of easy, expensive credit. I know, because this summer I took out a payday loan in about 45 minutes. If I hadn’t cancelled it within 72 hours, as the law allows, and if I made all 10 payments on time, I could’ve ended up paying $2,362.23 to retire my five-month $1,500 debt, an effective APR of 612 percent.
This summer in East Austin, a laundromat at a busy intersection converted nearly overnight into a TitleMax, just a mile from another TitleMax. On a nearby major thoroughfare, a single-wide trailer next door to a biker bar specializes in a secondary market, offering to pay off title loans for beleaguered borrowers. On a three-quarter-mile stretch of East Seventh Street alone there are seven payday loan stores and title businesses, each advertising some variation of “up to $1,000 cash—fast!” The growth of these so-called credit access businesses has been explosive in Texas, tripling in the past eight years to more than 3,200 today, the most of any state. They tend to cluster in neighborhoods like mine, where low-income hardworking people live paycheck to paycheck.
Let’s be plain about what makes these businesses so profitable: usury. Structuring a loan to charge $130 in fees per $100 borrowed (that’s the average for a payday loan paid back in installments) is usury, regardless of the political contortions that keep such businesses legal. The major faith traditions and civilized societies have long recognized the dangers of interest-bearing loans, either banning or severely limiting interest rates. In that respect, Texas is an outlier, even among American states. Payday and title lenders in Texas have no limits on what they can charge. Almost every other state either bans payday loans or imposes a strict cap on interest and fees, often 36 percent.
The legally and morally rickety structure of credit access businesses in Texas is predicated on circumvention of the state’s anti-usury laws. The loans actually are barred from exceeding 10 percent interest. It is the fees, often triggered multiple times, that strip working people of their meager earnings.
The fact that our political leaders, largely a conservative Christian lot, prefer to avoid even perfunctory regulation of this predatory industry speaks not only to their corruption, but to a disturbing economic and social bifurcation in our society.
One of the more grotesque aspects of the legislative discussion about payday loans is the infantilization of people who use them, even by some well-meaning advocates. The presumption is not that the industry’s business model is predatory, but that its customers are financial illiterates too stupid to read the fine print. The poor things. Legislators don’t understand that Those People are making a rational choice. Many of them understand that they’re being ripped-off, but paying too much is better than the alternative: having their electricity or phone cut off, not being able to buy groceries, getting evicted. The options available to working people trying to survive on wages are different from those available to wealthy legislators with mutual funds, mineral rights, blind trusts, 401(k)s, college savings accounts, and all the other taken-for-granted accoutrements of casual affluence. They don’t understand how the other half lives.
State Rep. Vicki Truitt, R-Southlake, is typical. Last session, she squashed efforts to apply usury laws to the industry and then failed to pass a half-measure bill that would have addressed the cycle of debt. She did manage to convince fellow legislators to pass her bill requiring additional disclosure of fees. But Truitt still seems mystified about the fundamentals.
“Why would someone make a decision before they had that [disclosure form]?” she wondered at a recent Capitol hearing.
As one woman whose car was repossessed by an auto-title lender explained to me: “Honestly, the problem isn’t that we don’t know what we’re getting into. When you hit crisis mode, you’re willing to do whatever it takes to get out of crisis mode.”
As a society, we’ve normalized “crisis mode” as a near-permanent affliction befalling millions of our fellow citizens. But I hope our hearts are not so hard nor our brains so soft that we can’t see the pointless cruelty of taking a dollar from a desperate person who has only asked for a dime.