Magazine article U.S. Catholic

Stamp out the Poverty Trap

Magazine article U.S. Catholic

Stamp out the Poverty Trap

Article excerpt

Ask just about any anti-poverty advocate about the worst scourges on the nation's poor, and without fail you will hear about the $7.4 billion payday loan industry. Defended by insiders as a legitimate free-market response to real-world cash flow problems, payday lenders have a noxious ability to persuade loan recipients into agreements that can turn a short-term cash flow problem into a long-term poverty trap. The industry's usurious rates and complicated repayment schemes represent little more than scam finance.

According to the Pew Charitable Trusts, about 12 million adults in the United States use payday loans each year that are designed to be unpayable over the short term in order to turn a profit for the lender. In condemning payday lending, a study from the U.S. Conference of Catholic Bishops reports that many borrowers end up paying far more in fees than the cost of the original loan. In fact, a typical two-week payday loan can carry an interest rate of 400 to 500 percent.

So why do low-income folks turn to such loans? Many have no choice. A 2016 survey found that 69 percent of Americans had less than $1,000 in total savings and 34 percent had no savings at all. An unexpectedly high heating bill, Christmas shopping, or the need for a car repair force many households to seek out quick short-term loans.

And studies report that the nation's un-or underbanked may number as high as 26.9 percent of the U.S. population, with specific pockets of more financially isolated communities where the underbanked reach as high as 40 percent. With little to no access to traditional banking services, these folks are forced to use gougers for financial services like cashing checks, wiring money, or originating small loans.

Past efforts to rein in payday lenders have focused on state or federal regulation of the industry, but there is little chance of new restrictions emerging from the federal Consumer Protection Agency. …

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