The legal usury of payday loans

Eric Garland Finance Trends 1 Comment

My colleague Dr. Sarah Kendzior has a new piece up for The Guardian that details how rapacious payday lenders extract 300-1000% interest from workers in already precarious positions of society. Try to wrap your head around the follow story of one attorney trying to extricate his clients from the tentacles of these organizations.

“Here’s a client of ours,” he says, showing me a legal brief. “She borrowed $100. She made one instalment payment, couldn’t pay the rest, and was sued. Since then they’ve collected $3,600 in payments by garnishing her wages. That’s 36 times the hundred bucks she owed. They told her she still owes $3,600 more. The wage garnishments are reducing the debt slower than the high interest, which is 200%. She called her attorney and asked ‘When will I be done paying this?’ And he said: ‘Never.’ It’s indentured servitude. You will never, ever be done.”

Vieth’s client is lucky compared with others mentioned in the case file: one borrowed $80 and now owes the payday lender $19,643.48.

I have a couple of angles on this. The first is empathetic. Put this business practice in the context of the recent scandals around municipal courts running debtors prisons. Imagine being a working person with two minimum wage jobs trying to borrow a few bucks to pay some parking ticket for which a municipality might throw you in jail. You miss the payment by a day. Then the city throws you in jail for two weeks, charging you $3,000 total in court fees and fines, while the payday lender tries to bleed you for $1000 – $19000.

There are people for whom that is American life in 2015.

The second angle is about the larger economic effect. This is money that is being stolen not only from the borrower, but from the economy as a whole. These people are losing their ability to consume products because thousands of dollars are being extracted from them in these flimsy legal fictions. Those dollars represent cars that will never drive off the lot, vacations un-taken, restaurants that go without diners, because the wages of these working class Americans are then diverted to financiers and local governments.

America’s business interests should declare war on these practices for the health of capitalism, if nothing else.