Vincent sent me a story from the latest issue of Business Week. On its surface, “The Poverty Business” is similar to pieces I’ve featured before, including Marc Hedlund’s guest-post on the dangers of the payday loan trap and my own review of Maxed Out, a film about the credit industry. In this new article, authors Brian Grow and Keith Epstein offer a complex view of the subprime lending problem.
In recent years, a range of businesses have made financing more readily available to even the riskiest of borrowers. Greater access to credit has put cars, computers, credit cards, and even homes within reach for many more of the working poor. But this remaking of the marketplace for low-income consumers has a dark side: Innovative and zealous firms have lured unsophisticated shoppers by the hundreds of thousands into a thicket of debt from which many never emerge.
Grow and Epstein look at various aspects of the subprime lending industry, providing stories of a woman who borrowed money for a car she could not afford; a tax-preparer that touts refund-anticipation loans; a senior citizen lured by the promise of a cheap computer; and two sisters who are mired deep in debt. The article features yet another warning about the danger of payday loans:
Thomas finances much of what she buys, but admits she usually doesn’t understand the terms. “What do you call it — interest?” she asks, sounding confused. Two years ago she borrowed $400 for rent and food from Advance America Cash Advance Centers Inc., a payday chain. She renewed the loan every two weeks until last November, paying more than $2,500 in fees.
These stories break my heart. While the borrowers are making the decisions to take on the debt burdens, they’re doing so without a real understanding of the consequences. They don’t have a financial education. They lack fundamental financial literacy. They probably don’t ask questions (not that they’d have a frame of reference for asking the right questions). This makes them easy targets for people who would take advantage of them.
The authors are scornful of predatory lending, especially the tactics used to part the poor from their money. They see lots to condemn in the greedy companies who lure “unsophisticated shoppers” into debt they cannot afford. But, unlike Maxed Out, which doesn’t address the notion of personal responsibility, Grow and Epstein suggest there are two sides to this issue.
Nobody, poor or rich, is compelled to pay a high price for a used car, a credit card, or anything else. Some see the debate ending there. [...] Others worry, however, that the widening income gap between the wealthy and the less fortunate is being exacerbated by the spread of high-interest, high-fee financing. “People are being encouraged to live beyond their means by companies that are preying on low-income consumers,” says Jacob S. Hacker, a political scientist at Yale.
It’s refreshing to read an article that spends time examining the bad choices debtors make, an article that features somebody confessing, “I should have done my homework.” “The Poverty Business” also features postscripts describing how some of these people have managed to salvage their situations.
One can sense in the piece a deep sorrow for a society that has reached a point where it is acceptable for businesses to squeeze money out of those who can least afford it.
This article is long, but it’s well worth reading. Vincent adds: “Be sure to read the related items to the right side of the text. Some of the items are text, some are graphic. I think you’ll find that they help to enrich the article.”
The related items include:
- Chart: Borrowing binge
- Graphic: Extreme interest
- Chart: The other banking system
- Graphic: From thin wallets, big money
- Extra report: Study now — and pay and pay later
- Chart: Expensive debt
- Extra report: The economics of the poverty business
- Extra report: Cutting the cost of poverty — This is probably of most interest to GRS readers
[Business Week: The poverty business, via VinTek]