Dragged Down by Debt
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Quinn: Dragged Down by Debt
People with shaky credit are getting suckered by risky loans against their paychecks, homes—and even cars.
By Jane Bryant Quinn
Newsweek
May 7, 2007 issue - Claudie Harris, 54, of Kansas City, Mo., knows about living on the edge. She owes about$5,000 toward her late husband's medical bills. She's paying it, slowly, from the salary she earns as a housekeeper at a facility for the mentally ill. But that leaves her a little short. So, to get by, she's been taking payday loans, which are loans against her future earnings. "It's easy money," Harris says.
People with shaky credit can borrow more easily than ever before—against houses, of course, but also against their paychecks and even their cars—whether or not they're in a position to repay. There are now some 24,200 payday-loan storefronts, up from 18,000 three years ago, according to Stephens Inc., a Little Rock investment bank—and more than 300 new payday outlets on the Internet. First American Loan Performance reports that subprime mortgages accounted for 16 percent of the market last year, up from 9 percent in 2000. Leverage like this puts consumers at much greater risk of delinquency and default.
With a payday loan, you write a postdated check against your next pay period and walk away with cash. The fees are stiff—Harris usually pays $50 for a $250 loan. In two weeks, the loan falls due. If you can't pay, it costs another fee to renew the debt for another two weeks. Pretty soon, the amount of interest could exceed the original loan, making it difficult to dig out: Harris's receipts show an annual interest rate of 521 percent.
For someone with a phone bill due, no cash or credit but a paycheck on the way, a single payday loan can work. Mary Jackson, of the payday trade group the Community Financial Services Association, calls them "a valuable public and consumer service." But to Jean Ann Fox, of the Consumer Federation of America (CFA), they're a "debt trap." Borrowers tend to take serial loans, at high expense, and struggle to repay. "It's like being an addict," Harris says (she's promised herself to end her debt and dependence by June 1).
Car-title loans can get consumers into even more trouble, says Randall McCathren, president of the auto-finance consultant BLC Associates. Like payday loans, they're marketed as a way to get quick cash in an emergency. You can borrow anywhere from $250 to $2,500 against a paid-up vehicle, giving the lender your title and a duplicate car key as security. There's a fee upfront and a triple-digit interest rate, the loan falls due in 30 days, and each time you renew you're charged the fee, plus interest, all over again. If you can't pay, you lose the car or truck you may need to get to work.
Thomas Elliott, 36, and Joshua Reel, 26, of Broadway, Va., are fighting to save a car. Last September, they took a $250 loan from Loan Max in Harrisonburg, Va., against a 1988 Pontiac. Both handicapped, they live on Social Security disability and can't read well enough to understand the loan documents, says their Legal Aid lawyer, Grant Penrod. They thought that a payment of at least $61 a month would retire the loan in four or five months. No dice. They paid $278, then went for help when they saw that the amount they still owed had actually risen to $309.86. Loan Max's attorney, William Pratt, says the loan was fully explained, but Loan Max is willing to give Reel and Elliott all their money back. Penrod thinks the men should go for damages, and no settlement has been reached.
Payday and car-title lenders tend to cluster in low-income neighborhoods—especially around military bases, where families are young and borrowers aren't very savvy about interest rates. Congress recently slapped a 36 percent interest-rate cap on loans made to members of the armed services. But it left out everyone else, who pay rates that sometimes exceed 700 percent, says CFA's Fox.
Of all the predatory loans, "exploding mortgages," with interest rates that wing up after two or three years, are probably the most toxic and have made the most headlines. They're typically granted to borrowers classed as "subprime"— those with credit scores under 620 (a 900 score is tops). But these are the very people least able to handle monthly payments that suddenly double or triple. The Center for Responsible Lending says that one in five of the subprime loans made in 2005 and 2006 will likely fail.
So far, the Feds have pretty much let the lending predators range unchecked. But there's something new today—"the high level of pain and suffering," says John Taylor, head of the activist National Community Reinvestment Coalition. "If this isn't enough to move Congress to act, what will it take?"
Reporter Associate: Temma Ehrenfeld, with Pat Crowley
URL: http://www.msnbc.msn.com/id/18367501/site/newsweek/page/2/
Part of me thinks that these people should have know what they were getting into, and should be more responsible. But another side of me sees how ruthless and predatory these lenders actually are. It's basically legalized loan-sharking - lending with triple-digit interest rates and if you can't pay up, they take more and more, and you have to borrow more and more.
Luckily I've always had credit cards, and even when I was struggling, I could use the cards at a reasonable interest rate to make ends meet until payday. I am tight with money and have never gotten in over my head, but I can see how it easily happens. I didn't always have health insurance, so one bad medical bill or loosing a job or whatever, and I can see how these people get in so deep so quickly.
Something has to be done to regulate these lending institutions.
People with shaky credit are getting suckered by risky loans against their paychecks, homes—and even cars.
By Jane Bryant Quinn
Newsweek
May 7, 2007 issue - Claudie Harris, 54, of Kansas City, Mo., knows about living on the edge. She owes about$5,000 toward her late husband's medical bills. She's paying it, slowly, from the salary she earns as a housekeeper at a facility for the mentally ill. But that leaves her a little short. So, to get by, she's been taking payday loans, which are loans against her future earnings. "It's easy money," Harris says.
People with shaky credit can borrow more easily than ever before—against houses, of course, but also against their paychecks and even their cars—whether or not they're in a position to repay. There are now some 24,200 payday-loan storefronts, up from 18,000 three years ago, according to Stephens Inc., a Little Rock investment bank—and more than 300 new payday outlets on the Internet. First American Loan Performance reports that subprime mortgages accounted for 16 percent of the market last year, up from 9 percent in 2000. Leverage like this puts consumers at much greater risk of delinquency and default.
With a payday loan, you write a postdated check against your next pay period and walk away with cash. The fees are stiff—Harris usually pays $50 for a $250 loan. In two weeks, the loan falls due. If you can't pay, it costs another fee to renew the debt for another two weeks. Pretty soon, the amount of interest could exceed the original loan, making it difficult to dig out: Harris's receipts show an annual interest rate of 521 percent.
For someone with a phone bill due, no cash or credit but a paycheck on the way, a single payday loan can work. Mary Jackson, of the payday trade group the Community Financial Services Association, calls them "a valuable public and consumer service." But to Jean Ann Fox, of the Consumer Federation of America (CFA), they're a "debt trap." Borrowers tend to take serial loans, at high expense, and struggle to repay. "It's like being an addict," Harris says (she's promised herself to end her debt and dependence by June 1).
Car-title loans can get consumers into even more trouble, says Randall McCathren, president of the auto-finance consultant BLC Associates. Like payday loans, they're marketed as a way to get quick cash in an emergency. You can borrow anywhere from $250 to $2,500 against a paid-up vehicle, giving the lender your title and a duplicate car key as security. There's a fee upfront and a triple-digit interest rate, the loan falls due in 30 days, and each time you renew you're charged the fee, plus interest, all over again. If you can't pay, you lose the car or truck you may need to get to work.
Thomas Elliott, 36, and Joshua Reel, 26, of Broadway, Va., are fighting to save a car. Last September, they took a $250 loan from Loan Max in Harrisonburg, Va., against a 1988 Pontiac. Both handicapped, they live on Social Security disability and can't read well enough to understand the loan documents, says their Legal Aid lawyer, Grant Penrod. They thought that a payment of at least $61 a month would retire the loan in four or five months. No dice. They paid $278, then went for help when they saw that the amount they still owed had actually risen to $309.86. Loan Max's attorney, William Pratt, says the loan was fully explained, but Loan Max is willing to give Reel and Elliott all their money back. Penrod thinks the men should go for damages, and no settlement has been reached.
Payday and car-title lenders tend to cluster in low-income neighborhoods—especially around military bases, where families are young and borrowers aren't very savvy about interest rates. Congress recently slapped a 36 percent interest-rate cap on loans made to members of the armed services. But it left out everyone else, who pay rates that sometimes exceed 700 percent, says CFA's Fox.
Of all the predatory loans, "exploding mortgages," with interest rates that wing up after two or three years, are probably the most toxic and have made the most headlines. They're typically granted to borrowers classed as "subprime"— those with credit scores under 620 (a 900 score is tops). But these are the very people least able to handle monthly payments that suddenly double or triple. The Center for Responsible Lending says that one in five of the subprime loans made in 2005 and 2006 will likely fail.
So far, the Feds have pretty much let the lending predators range unchecked. But there's something new today—"the high level of pain and suffering," says John Taylor, head of the activist National Community Reinvestment Coalition. "If this isn't enough to move Congress to act, what will it take?"
Reporter Associate: Temma Ehrenfeld, with Pat Crowley
URL: http://www.msnbc.msn.com/id/18367501/site/newsweek/page/2/
Part of me thinks that these people should have know what they were getting into, and should be more responsible. But another side of me sees how ruthless and predatory these lenders actually are. It's basically legalized loan-sharking - lending with triple-digit interest rates and if you can't pay up, they take more and more, and you have to borrow more and more.
Luckily I've always had credit cards, and even when I was struggling, I could use the cards at a reasonable interest rate to make ends meet until payday. I am tight with money and have never gotten in over my head, but I can see how it easily happens. I didn't always have health insurance, so one bad medical bill or loosing a job or whatever, and I can see how these people get in so deep so quickly.
Something has to be done to regulate these lending institutions.
My whole life
was like a picture
of a sunny day
“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.”
― Abraham Lincoln
was like a picture
of a sunny day
“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.”
― Abraham Lincoln
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I know many many people who are simply living beyond their means, on purpose, because they make it a priority of keeping up with the Joneses. Materialism is a part of our society, and until people realize that things, especially large houses, don't really make them happy, that's when they'll stop letting the lending institutions sway them into making bad choices. It's all about knowing one's financial limits!
currently i do not live above my means. i do not find it necessary to keep up with the joneses. if something is not necessary then it doesn't get bought (with a few exceptions) people are constantly told what they 'need', what they 'want' and when they see those adverts they say well why not. how about cause you can't afford it without going into debt? i know how sanctimonious i sound when i go on about people living beyond their means but it just busts my hump when i see people losing their houses because they overextended themselves and the banks won't be flexible. we're constantly being bombarded with the newest, biggest, brightest whatever and the majority of the time the purchase is unnecessary. we are just cogs in the massive capitalist machine and for a lot of people it sucks.
*okay rant over*
take a good look
this could be the day
hold my hand
lie beside me
i just need to say
My wife and I are currently renting, but have been casually looking at buying a home. All we can really afford for a mortgage + tax payment is a small starter house or fixer-upper (maybe like $140k or below). We were pre-approved for $280k... We both have excellent credit, but we told the loan officers our monthly income and bills and how they came up with this amount is a mystery.
was like a picture
of a sunny day
“We can complain because rose bushes have thorns, or rejoice because thorn bushes have roses.”
― Abraham Lincoln
i have no credit cards. nor do i have a car. but don't worry i'm australian so my commy ways won't harm your economy.
take a good look
this could be the day
hold my hand
lie beside me
i just need to say
Don't get Loans from these types of companies.
i've heard about people like you - they say you carry a plague far worst then if there was no tv ... you will be duly reported ...
With the exception of a house, I think the statement "If you can't pay cash for it, you can't afford it" are words to live by.
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
I go myself into debt a few years ago and am still working my way out of it. IT SUCKS. I kept my credit score up because i alwayts make my payments, but I never have any money after.
i'm more then likly going to borrow extra on my school loans to pat off the Credit cards, because the intrest rate is better and the payments are WAY lower.
ebay isn't evil people are
The South is Much Obliged
no tv = plague? i dont think so. tv is shite.
take a good look
this could be the day
hold my hand
lie beside me
i just need to say
I'm not really a fan of school loans either....but I do see your point as an investment. I think there are enough scholarships out there and enough financial aid....as well as *GASP* working while you're in college that you should be able to get through without loans or with very minimal ones.
...are those who've helped us.
Right 'round the corner could be bigger than ourselves.
i agree...if i dont have the cash im not buying it...ive seen to many of my friends screw themselves over with credit cards or loans....
Prevail-regardless what the cost might be
Power-flows inside of me, you can't bring me
Never-fall as long as I try
Refuse-to be a part of your lie
Even-if it means I die, you can't bring me
You...can't...bring...me...down!