Are PayDay lenders better than banks? #OWS
Sometimes my plan of getting up super early to write on my blog fails, and this is one of those days. But I’m still going to ask you to read this article from the New Yorker written by Lisa Servon and entitled, “The High Cost, For The Poor, Of Using A Bank.” Here’s a key passage, but the whole thing is amazing, and yes, I’ve invited her to my Occupy group already:
To understand why, consider loans of small amounts. People criticize payday loans for their high annual percentage rates (APR), which range from three hundred per cent to six hundred per cent. Payday lenders argue that APR is the wrong measure: the loans, they say, are designed to be repaid in as little as two weeks. Consumer advocates counter that borrowers typically take out nine of these loans each year, and end up indebted for more than half of each year.
But what alternative do low-income borrowers have? Banks have retreated from small-dollar credit, and many payday borrowers do not qualify anyway. It happens that banks offer a de-facto short-term, high-interest loan. It’s called an overdraft fee. An overdraft is essentially a short-term loan, and if it had a repayment period of seven days, the APR for a typical incident would be over five thousand per cent.
It makes me wonder whether, if someone did a careful analysis with all-in costs including time and travel, whether PayDay Lenders are not actually a totally rational choice for the poor.