Loans at triple-digit interest perpetuate poverty

It’s easier to condone a loan at an exorbitant interest rate if you see poverty as a temporary condition resulting from chance – these are known as the “deserving” poor, and they can be counted on to pay back the loan.

Then there is the biblical view: The poor will be always be with us, and despite poor choices on drugs or criminal behavior, they are owed the same dignity and respect accorded all humans. An emergency loan of last resort, even at a ruinously high rate, at least keeps them off the street and their children fed.

A third approach, however, sees poverty as not just the product of joblessness, low wages and poor life choices but a system that exploits their cash flow emergencies in ways that perpetuate their impoverishment.

FEWER OPTIONS, RISKS

We are no sociologists, so we won’t attempt to defend one approach over another – although we’re pretty certain that those profiles overlap for many of the poor at some time in their lives. But common to poverty are the foreclosed options that keep them poor: changing schools or jobs, buying healthier foods, getting preventive health care, commuting from more affordable housing, or relocating. Living paycheck to paycheck also means taking fewer risks so as not to jeopardize that paycheck, like challenging an unfair demotion, demanding the landlord replace a moldy wallboard or taking off work when you should be home with a sick child.

Those who prey on these insecurities and constant cash shortages by advancing loans at ruinously high interest rates only add one more burden – long-term debt – to the entrapment of the poor.

We don’t deny that instant loans stave off the pain of dislocation in the short run – nobody wants to see their belongings stacked on the sidewalk and with no place to go that night.

But a system that permits loans with no realistic chance of being paid off is only postponing the misery while ensuring it will continue. Bills currently in the Legislature to allow such loans abet the poverty industry when lawmakers instead should be looking to break its grip.

UNREASONABLE

IS UNETHICAL

It used to be that cash flow problems among the working poor were taken care of by family and relatives. Then credit unions were set up to make small loans to members with jobs. But once credit and debit cards with cash advances were introduced, every ATM became a mini-credit union. After interest was capped in Arizona at 36 percent, payday loans at triple-digit rates up to 400 percent took their place. And when that industry was shut down by voters, the car title loan business exploded, with interest rates rising as high as 204 percent.

Now that title loans are under fire even from free-market conservatives, the latest is a proposal in the Legislature to allow interest rates of up to 17 percent a month on loans up to $2,500 for two years, when the loan would come due at $10,400. Those seem like unreasonable terms to us, and it is unethical to lend to people with little chance of repaying the loan, no matter how dire the circumstances.

SUBSIDIZED LOANS

What’s the alternative? As with other social welfare safety net programs, if the private sector can’t find a business model that works (and, in this case, is ethical), then either a government program or one with public subsidies would seem to be called for. The United Way, for example, helps the working poor get back earned income tax credits. Why couldn’t it use donations to set up a short-term, affordable loan pool for those same clients, with future tax credits as collateral? And while they are at it, perhaps they could make the kind of micro-loans for single entrepreneurs that are more difficult to obtain from banks.

On the supply side of the issue, higher wages would help the poor not only get through emergencies without needing instant loans but even save a little for a rainy day. Wal-Mart is soon to pay every employee at least $10 an hour – nearly $2 above the Arizona minimum. It also offers payday loans at low rates and emergency loans at nearly zero interest.

Not every company can afford that kind of financial safety net. But the point is that if the Legislature is going to count on the private sector to shore up the emergency needs of the poor, it needs to put into place not only ethical lending rules but incentives for alternative lending. The resources of nonprofits and private corporations alike should be tapped – triple-digit interest should be the measure of last resort, not the first.