Preying on the Poor

One of the most challenging and complex economic realities faced by many of our neighbors who live paycheck to paycheck is finding financial resources to cover immediate and unexpected expenses. To address this need, a profitable, multibillion-dollar payday loan industry has emerged in our free-market economy. 

In an Atlantic article titled “Payday Lending: Will Anything Better Replace It?” Bethany McLean provides a helpful window into the troubling, yet complex world of this industry. Payday lending organizations serve more than nineteen million American households each year. 

The typical payday loan is about $350 and must be repaid within two weeks. In theory, these small loans provide some cash liquidity until the next paycheck arrives. A single interest fee, usually around $15, is charged per $100 borrowed. This charge, when annualized, makes the interest rate levied by payday lenders an astounding 400 percent. 

Yet this is hardly the worst of it. Many times, working poor borrowers cannot afford to pay back their loan within the standard two-week window. So the outstanding amount is rolled over and more fees are added. Like a snowball gaining speed and mass as it heads downhill, the interest costs continue to skyrocket as the already poor borrower becomes poorer because of these debt traps.

Advocates of payday loans suggest that the high interest charges exacted on the working poor are not unfair because payday loan operations provide a necessary service for cash liquidity. Payday loan companies also point out the high risk of default requires the high reward of high interest. Others point out that the profit margins of the payday loan industry are similar to other industries and are not excessive. Yet, in a time of historically low interest rates for more materially advantaged citizens, the high interest rates exacted by payday loan companies on the poorest citizens seem increasingly problematic.

While the payday loan system is viable from an economic point of view, from a moral perspective I do not believe it is an acceptable answer to meet the liquidity needs of the working poor. This status quo must be challenged, and a better way forward needs to be championed. Does the current, unacceptable payday lending reality call Christians and Christian leaders to work for a better solution?

What might a local church do to provide other alternatives for the working poor who face unexpected expenses? How do we wisely come alongside a growing number of people who are living paycheck to paycheck with no financial margin for emergencies? Looking for a better solution than the shortsighted, Band-Aid of payday lending, Bethany McLean concludes, “The problem isn’t just that people who desperately need a $350 loan can’t get it at an affordable rate, but that a growing number of people need that loan in the first place.”