Face to Face with Inequality

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The Spirit of Indenture

Jeffrey Williams, a professor of English and literary and cultural studies at Carnegie Mellon, compares student loan debt to indentured servitude. Here’s the pith of his argument:

“the growth in debt has ushered in a system of bondage similar in practical terms, as well as in principle, to indentured servitude. The analogy to indenture might seem exaggerated but actually has a great deal of resonance. Student debt binds individuals for a significant part of their future work lives. It encumbers job and life choices, and it permeates everyday experience with concern over the monthly chit. It also takes a page from indenture in the extensive brokerage system it has bred, from which more than four thousand banks take profit (even when the loans originate with the federal government, they are still serviced by banks, and banks service an escalating number of private loans).”

It struck me how we would be reflexively outraged by 17th-century forms of indentured servitude, but we are pretty accustomed to modern versions of it, to the point of having to work at seeing it clearly.

A summary of Williams’ argument is available for free, while the full article is harder to lay hands on.

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Preying on Would-be Retirees

The New York Times has an article about “pension advances,” which may carry interest rates as high as 106 %. Here’s a little extract: “A review by The New York Times of more than two dozen contracts for pension-based loans found that after factoring in various fees, the effective interest rates ranged from 27 percent to 106 percent — information not disclosed in the ads or in the contracts themselves. Furthermore, to qualify for one of the loans, borrowers are sometimes required to take out a life insurance policy that names the lender as the sole beneficiary.

lumpsumHere’s the website of the most polished one I could find. The company is mentioned in the NYT article. They seem to go to some length to make it appear not to be a loan–possibly because a loan is associated with an interest rate, and people might make uncomfortable inquiries when they realize they are taking out a loan. If you visit the website, a rep will attempt to chat with you after a few seconds. Maybe we should try it and see what they have to say for themselves.

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Anatomy of Predatory Credit

Predatory lending in a nutshell

Predatory lending in a nutshell

The Pew Research Center’s payday loan infographic is helpful, but it doesn’t quite show what sort of a trap you fall into when you borrow the same $375 loan over and over again without ever paying off principal. Their latest study on the payday loan industry reports that only 14% of typical payday loan borrowers have room enough in their budget to pay off the loan in full. Another interesting finding from the same report is that 27% of payday borrowers also end up with overdraft fees from the bank when the payday lender withdraws the full amount of the loan. That would mean you pay $85 or more for the privilege of disposing of $375 for the duration of two weeks.

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The State of Consumer Banking

The New York Times has a report on banks colluding with online loan sharks to defraud their low-end customers:
1. The banks charge overdraught fees when the loan sharks’ automatic withdrawals cause the borrower to be overdrawn.
2. They will let the loan sharks take only the interest on the loan even when the borrower wants to pay it back in full, so that the loan is rolled over and another round of fees can be levied.
3. When people try to stop the automatic withdrawals, the banks do not honor their requests.
4. When the borrower tries to close the bank account against which automatic withdrawals are being made, the bank will keep it open and charge fees every time the loan sharks come for a withdrawal.

Yet another incentive to stop patronizing regular banks and find a local credit union instead.

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Shopping for a Payday Loan


Check Into Cash Rate Board

I’ve made two shopping trips and hit three payday loan stores and conclude that the situation is pretty straightforward. Around here, you can get up to $255 at a cost of $45 in each of the three check cashing stores I tried.  Must be a regulatory limit. The picture at left shows the whopping interest rate of 460% and peanuts. And you get to hang on to the loot for only two weeks.

All it takes is a paystub, your most recent bank statement (a printed version), a government-issued ID, and a check. In one store I was directed to cough up my social security number, for reasons unspecified. Social security number? When they are not actually checking your credit? I wonder if real customers feel ok just handing it over. (Perhaps I should hang out there for a while one Saturday and see what people do.)

If you compare this loan to taking out a mortgage, it is super-easy. But it’s actually not half as easy as I had imagined it to be. The printed statement is definitely a pain. And then you have to go back again, in person, at your next payday to hand over the entire $300. You have got to want that money.