I have a brilliant idea for a charity. The objective is to help people who are financially struggling become aware of how much of their money management problems are within their own power to control.
I feel obligated to fill in some background here. Payday lenders give loans to people that have very poor credit. They don’t technically charge interest, as they prefer to call them “fees” and fees tend to run about $15 per 100 borrowed for a 2 week loan. They typically hold a post-dated check for the amount of the loan as collateral. People typically use these to cover short term budget gaps… You don’t have the $155 to pay the utility bill. It’s embarrassing to ask your friends and family for the money, and they probably don’t have it anyway. Or maybe you already owe them money and they’re unlikely to fork over more. If you don’t get the money you’ll have to live life in the dark for 4 days until your paycheck, and then you’ll have to pay a late-fee and a reconnection fee and probably be out 30 bucks anyway. It seems perfectly logical in that moment to pay a $30 fee to take out a $200 loan ($170 of which you actually keep) pay the bill on time to stay in hot showers and eat taco bell with the $15 left over. So you write the payday loan company a post-dated check for $200 which they hold as collateral, get your $170, pay your bill and feel like you made the best decision in a bad situation.
The problem comes 14 days later when you don’t have the $200. You can spare $85, but they’re not interested in partial payments. So your only option is to hand over another $30 fee to buy yourself another 2 weeks. If you don’t they’ll try and deposit that check they’re holding and it will bounce which will cost you $25, and you’ll still owe them $200 plus a $30 “extension fee” plus they’ll still be holding your check. If you try and blow them off they will call your work and humiliate you and they will call the cops and charge you with passing bad checks (which is technically true). So you get stuck on the poverty treadmill for months paying them $30 every 2 weeks while you try and scrape together $200 at once in a world where every dollar you make has someone already calling dibs on it. Eventually a month rolls around where you get 3 paychecks, instead of 2 and you still only have to pay all your bills once and you can get out from under this thing. If that took 3 months to happen you will have paid a total of $210 in fees to borrow $200.
And these companies have lots of repeat customers… so as horrible as this all sounds people go through it and then choose it again. The average customer loan is $375, and they pay 140% in fees for an average of $520 and dealing with this stress every 2 weeks for 5 months.
They post-dated check as collateral is most common, but a car title will work too. And pawn shops are similar, all that stuff was originally collateral for a loan. Some of those were “loans” in name only and the seller had no intention of retrieving their stuff, but a lot of people cycle back in and out with the same valuables over and over again.
My charity is going to work just like that. None of the employees will even know there’s anything else to it. But after a year I’ll bring the customer into the back office and I will show them a tally of all their loan payments. Showing them how much they borrowed and how much they paid in fees. I’ll explain that as poor as they feel, they managed to squeeze this money out of their budgets when they had to. They’ve proven they can do it. I will then swear them to secrecy and refund all their fees. I will recommend that they put it in a savings account and set up an automatic transfer to help it grow. I will beg with them that if they ever have to pull the money out of their emergency fund for them to fight as hard as they did to come up with the extension fee every 2 weeks to get that emergency fund built back up. And I will explain that they will never be allowed to borrow money from me again.
Debt is evil. Sometimes it’s a necessary evil, but it’s an evil none the less.