Charging high fees has become a big business in America, with Wall Street financing the firms that make short-term, very high interest loans.
It’s expensive being poor, the writer James Baldwin famously said. Baldwin uttered those words fifty years ago, long before the working poor became a big business—long before the invention of the payday loan, rent-to-own, and a long list of diabolically clever ideas that entrepreneurs have devised to get hundreds-of-millions-of-dollars rich off those with thin wallets.
Call it a poverty tax. It’s the hundreds of dollars, if not thousands, in extra fees people making $20,000 or $25,000 or $30,000 a year pay because they have lousy credit or because they have no savings.
Add up all the profits pocketed by all those payday lenders, check cashers, subprime auto lenders, and other Poverty, Inc. enterprises and divide it by the forty million households the Federal Reserve says survive on $30,000 a year or less. That works out to around $2,500 per household, or a poverty tax of around 10 percent.
The corner check casher takes the biggest bite, at least from those fifteen million or so Americans who have no bank account—the so-called unbanked. In the main, these are people who’ve bounced too many checks or otherwise messed up their relationship with a bank.
How much does the average check-cashing customer fork over? According to Matt Fellowes, who investigated the high price of being poor as a researcher with the Brookings Institution, the typical unbanked worker bringing home $22,000 a year spends roughly $800 to $900 a year in check-cashing fees. That figure tops $1,000 annually when you include the fees the unbanked pay for money orders and the additional fees check cashers charge (around $2 a check) when you need to pay your bills.
The payday lender—those in the business of making horrifically expensive loans against a person’s next paycheck, her social security check, or, increasingly, an unemployment check—takes another big cut of the meager earnings of the working poor. The single mom struggling to get by on $20,000 a year is forever falling a few bucks short before payday, but that’s the brilliance of the payday industry, which dates back to the early 1990s. In less than ten minutes, she’ll have a few hundred dollars cash in her hands, no questions asked—and then be charged a fee that works out to an annual interest rate of 400 percent.
The average payday customer pays between $600 and $700 a year in fees. More than ten million people avail themselves of a payday lender each year.
The rent-to-own industry draws less than half that many customers but generates around the same revenues as the payday business. The genius of rent-to-own is that its proprietors have figured out how to collect $1,400 in weekly installments on the same child’s bedroom set you could pick up for $600 with a credit card. Can’t afford a computer for the kids? No problem. The corner rent-to-own store also carries laptops and PCs, along with flat screens, washers and dryers, and living room sets.
The rent-to-own customer, of course, could choose to set aside some money each week until she has saved enough to buy the item in a retail store. She could frequent a secondhand shop. But for essentials there’s the risk of being dubbed a negligent parent by the authorities or family, and can you blame the security guard making $25,000 a year or home health aide bringing in $15,000 annually for wanting to come home to a comfortable easy chair and a large flat-screen TV? The point is that the rent-to-own customer is typically paying two and a half times as much as those who have the means to buy retail.
The average rent-to-own customer spends around $1,200 a year. That means the typical rent-to-own customer pays an extra $700 annually because he or she doesn’t have the cash or credit to buy it at a store.
Those living on the bottom of the economic pyramid pay more in a wide array of other ways. The subprime insurance market is its own racket, and even mainstream insurers charge more for auto insurance if you live in an unsafe neighborhood where robberies are more common. Select credit-card companies still cater to those with a subprime credit score of less than 620—but you’ll pay dearly for the privilege of carrying that plastic in your pocket. For instance, there’s First Premier, which charges a $95 application fee and both a $45 annual fee and a $6.25 “monthly servicing fee” for a card carrying an APR of 36 percent, which at least is better than the 49.9 percent card it was peddling last year.
And then there’s the steep cost of financing your car if you’re one of the fifty million or so Americans suffering from a subprime credit score. Rather than a car loan carrying an annual interest rate of around 5 percent, the subprime customer pays interest rates of 18 or 20 or 25 percent a year, if not more.
The person paying 20 percent interest on a $10,000 car loan will pay $900 more each year on a five-year loan compared to the person paying an interest rate of 5 percent on that same loan amount.
Thankfully, a good portion of the working poor never resort to a payday loan. They avoid paying the steep rates charged by the local Rent-A-Center. Plenty of people earning less than $30,000 a year have a checking account and good credit. There’s also help on the horizon as the new Consumer Financial Protection Board has singled out payday loans and subprime auto finance as two of its top priorities.
Yet don’t underestimate the ingenuity or hunger for profits driving those who the author Mike Hudson dubbed “merchants of misery.” A few years back, I attended the annual Check Cashers Convention, where I sat in on a ninety-minute presentation dubbed, “Effective Marketing Strategies to Dominate Your Market.” Speaking to a standing-room-only crowd, a consultant named Jim Higgins shared his tips for turning the $1,000-a-year check cashing or payday customer into one worth “$2,000 to $4,000 a year.” Pens scribbled furiously as he tossed out ideas: raffle off an iPod. Consider scratch ’n win contests. Institute the kind of customer reward programs that has worked so well for the airlines. And for those who are only semiregulars, offer a “cash 3, get 1 free” deal. After all, Higgins told the crowd, “These are people not used to getting anything free. These are people not used to getting anything, really.”
Adapted from Broke, USA: From Pawnshops to Poverty, Inc.—How the Working Poor Became Big Business.