[The following is an excerpt from Unleashing Opportunity: Why Escaping Poverty Requires A Shared Vision Of Justice.
In the debate over poverty in America, there is a serious disagreement about how best to increase the rewards of work and encourage economic mobility. Yet whatever one’s view, no one in this policy debate would contend that businesses and government should take more money from the poor by deceptive and exploitative means.
That, however, is exactly what is happening under the radar across the country. As we engage in a largely theoretical debate about the causes and cures of poverty, the poor are being cheated out of billions of dollars by an unholy alliance of business and government known as the payday loan industry.
If you live in one of the 36 states that allow payday loans, you have probably seen the storefronts in low-income neighborhoods and near military bases and nursing homes. These businesses offer short-term loans without credit checks. A typical two-week payday loan has an annualized interest rate of between 400 and 500 percent. The median income of payday borrowers is about $22,000 a year – below the poverty line for a family of four.
Advertisements for payday loans emphasize temporary help in cash flow emergencies. But that is not the real business model at work here. Lenders make their profits on repeat borrowers who are forced to roll over loans and spend much of the year in debt.
About 75 percent of fees collected by payday lenders come from borrowers who take out more than 11 loans a year. “The theory of the business,” according to one payday loan executive, “is [that] you’ve got to get that customer in, work to turn him into a repetitive, long-term customer, because that’s really where the profitability is.”
The indiscriminate offer of credit is really the encouragement of debt servitude. And businesses that depend for their profits on the abuse of debt are abusing their customers and degrading their dignity.
Predatory payday lending amounts to the systematic targeting of the poor for profit and revenue. It also represents a dividing line in political philosophy. Payday lending is often defended by appealing to rights: to economic rights (particularly the right of businesses to charge interest at any rate without determining an ability to repay) and to individual rights (particularly the right of a person to take out a loan). But both of these conceptions of rights end up being the ability for the strong to exploit the vulnerable. And any view of government committed to public justice will reject that.