Her car had broken down. She needed the car to drop her daughter off at day care and to get to work. She did not have money for the needed repairs. She had no savings and no credit card. She had no family or friends who could help her.
So she did what many lower-income people do in such situations. She took out five payday loans from five different payday lenders. The loans ranged from fifty-five dollars to three hundred dollars each. The fee to get the loans was fifteen dollars for each hundred dollars borrowed.
She knew she would not be able to pay the loans back on time. California does not allow lenders to “roll over” (refinance) loans. She paid back the first loans and then took out more—from the same five lenders.
The lenders tried to withdraw the money she owed from her checking account. She did not have sufficient funds. Her bank then charged her with overdraft fees that came to more than three hundred dollars. She paid off the overdraft charges and closed her checking account.
Although this borrower is like many others, every story is different.
About one out of three payday loan borrowers do so because of an unexpected expense. Most borrow because they are unable to make ends meet. One out of four Americans have no emergency savings at all.
Banks and credit unions are not lending to lower-income workers.
Many payday loaners follow the rules. Many do not. But borrowers and lenders need each other because wages are low and living costs are high. This is an industry that reflects the economy.
Source: The New Yorker February 18, 2014